Prudential Bancorp
Annual Report 2018

Plain-text annual report

P r u d e n t i a l p l c A n n u a l R e p o r t 2 0 1 8 We do life. H K S t o c k C o d e : 2 3 7 8 Prudential plc Annual Report 2018 Prudential helps people de‑risk their lives and deal with their biggest financial concerns. Our year in numbers Summary financials 2018 2017 Change on an actual exchange rate basis8 Change on a constant exchange rate basis8 Adjusted IFRS operating profit based on longer-term investment returns1 £4,827m £4,699m Underlying free surplus generated2 Life new business profit3 IFRS profit after tax4 Net cash remittances from business units5 IFRS shareholders’ funds European Embedded Value (EEV) shareholders’ funds Group Solvency II capital surplus6,7 Full-year ordinary dividend 2018 2017 Notes 1 This alternative performance measure is reconciled to IFRS 4 profit for the year in note B1.1 of the IFRS financial statements. 2 For insurance operations, underlying free surplus generated represents amounts maturing from the in-force business during the period less investment in new business and excludes non-operating items. For asset management businesses, it equates to post-tax operating profit for the period. Restructuring costs are presented separately from the underlying business unit amount. Further information is set out in note 10 of the EEV basis results. 3 New business profit on business sold in the year, calculated in accordance with EEV principles. £4,047m £3,640m £3,877m £3,616m £3,013m £2,390m £1,732m £1,788m £17.2bn £16.1bn £49.8bn £44.7bn £17.2bn £13.3bn 6% 14% 11% 30% – 3% 11% 7% 26% (3)% 7% 11% 29% 49.35pence +5% 47 pence IFRS profit after tax reflects the combined effects of operating results determined on the basis of longer-term investment returns, together with short-term investment variances, results attaching to disposal of businesses and corporate transactions, amortisation of acquisition accounting adjustments and the total tax charge for the year. 5 Net cash remitted by business units are included in the Holding company cash flow, which is disclosed in detail in note II(a) of the Additional unaudited financial information. This comprises dividends and other transfers from business units that are reflective of emerging earnings and capital generation. 6 The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring fenced with-profit funds and staff pension schemes in surplus. The estimated solvency positions include management’s calculation of UK transitional measures reflecting operating and market conditions at each valuation date, which for both 2018 and 2017 reflects the approved regulatory position. 7 Estimated before allowing for second interim ordinary dividend. 8 Further information on actual and constant exchange rate basis is set out in note A1 of the IFRS financial statements. Prudential plc Annual Report 2018 www.prudential.co.uk 0 1   G r o u p o v e r v e w i 0 2  i S t r a t e g c  r e p o r t 0 3  G o v e r n a n c e 0 4  D i r e c t o r s ’  r e m u n e r a t i o n  r e p o r t 0 5  i F n a n c a i l  s t a t e m e n t s 0 6    E u r o p e a n E m b e d d e d V a u e  ( E E V )  b a s i s  r e s u l t s l 0 7  A d d i t i o n a l  i n f o r m a t i o n Contents 01 02 03 04 05 06 07 Group overview Chairman’sstatement GroupChiefExecutive’sreport Strategic report Ataglance Ourbusinessmodel Ourdistribution Demergerupdate Ourperformance Ourbusinesses ChiefFinancialOfficer’sreportonthe2018financialperformance GroupChiefRiskOfficer’sreportoftherisksfacingourbusiness andhowthesearemanaged Corporateresponsibilityreview Governance Chairman’sintroduction BoardofDirectors Howweoperate Riskmanagementandinternalcontrol Committeereports Statutoryandregulatorydisclosures IndextoprincipalDirectors’reportdisclosures Directors’ remuneration report AnnualstatementfromtheChairmanoftheRemunerationCommittee OurExecutiveDirectors’remunerationataglance SummaryofthecurrentDirectors’remunerationpolicy Annualreportonremuneration Supplementaryinformation Financial statements European Embedded Value (EEV) basis results Additional information Indextotheadditionalunauditedfinancialinformation Riskfactors Glossary Shareholderinformation Howtocontactus TheDirectors’ReportofPrudentialplc fortheyearended31December2018 issetoutonpages2to7,88to130and 378to423,andincludesthesections oftheAnnualReportreferred tointhesepages. Page 02 02 04 09 10 12 14 15 16 18 38 52 70 87 88 89 95 107 109 128 130 131 132 135 137 142 166 171 341 377 378 407 416 420 423 www.prudential.co.uk AnnualReport2018 Prudential plc 01 Chairman’s statement – Paul Manduca Continuing to deliver long-term value to our customers I am pleased to introduce Prudential’s 2018 Annual Report. The Company has performed well amid uncertain macro-economic conditions, continuing to deliver value for our customers, shareholders and wider stakeholders. We have also made good progress towards our planned demerger of M&GPrudential from Prudential plc. Ourperformancedependsonthequality ofourproducts,whichmeetessential needsforourcustomers.Wearestrongly awareofourpurpose,whichistohelp peoplede-risktheirlivesanddealwith theirbiggestfinancialconcerns.Our productsandservicesaredesignedand deliveredwiththatpurposeclearlyinmind. Thequalityofourfinancialperformance during2018isareflectionofoursuccessin providingvaluetoourcustomers. Wehavebeenworkinghardonthe proposeddemergerofM&GPrudential fromtheGroup,whichweannouncedin March2018.Weremainconfidentthatit willresultinthecreationoftwobusinesses withdistinctinvestmentprospects,each offeringcompellingpropositionsto customersandshareholders.Thepractical stepsneededtodeliverthedemergerare progressingasplanned.TheBoardis focusedonensuringasmoothtransition andthatbothbusinesseshavethe necessarymanagementandboard expertisetogivethemthebestpossible starttolifeafterthedemerger.Thishas includedtheappointmentofMikeEvans asChairofM&GPrudential. Performance and dividend TheGroupdeliveredanotheryearof sustainableoperatingandfinancial performanceduring2018.Inviewofthis performance,theBoardhasdecidedto increasethefull-yearordinarydividendby 5percentto49.35pencepershare.Inline withthis,theDirectorshaveapproved asecondinterimordinarydividendof 33.68pencepershare. Board changes Awell-runcompanyisbuiltthroughgood decision-makingandexecution,androbust governanceisthefoundation.Duringa timeofbothexternalandinternalchange, theBoardmustbedecisiveandexerciseits judgementinatimelymanner. IthasbeenaprivilegetoserveontheBoard ofPrudentialplcsinceOctober2010,and tohaveservedasChairmansinceJuly 2012.TheBoardismindfulthatthe CorporateGovernanceCodestatesthat achairshouldnotremaininpostbeyond nineyearsfromthedateoffirst appointmenttotheBoard.However,to helpprovideBoardstabilityduringthe periodcoveringthedemergerof M&GPrudential,Ihaveagreedtoremain asChairmanuntilMay2021,subjectto re-electioneachyear. WehavealsolookedatourwiderBoard compositionasweheadtowardsthe demergerofM&GPrudential.AsChief ExecutiveofM&GPrudential,JohnFoley willnaturallystanddownfromtheBoard aspartofthetransition.Havingtakeninto accountthechangedshapeofthe PrudentialGrouppost-demergerandthe reducednumberofbusinessunits,the BoardhasdecidedthattherolesofChief ExecutiveofPrudentialCorporationAsia andChairmanandChiefExecutiveof JacksonHoldingswillnolongerbe executivedirectorrolesontheBoard, althoughtheywillremainontheGroup ExecutiveCommittee.JohnFoley,Nic NicandrouandMichaelFalconwillnotseek re-electionandwillstepdownatthe2019 AnnualGeneralMeeting(AGM).My thanksgotoallthreeofthemfortheir serviceontheBoard. LordTurnerhasalsoannouncedthathe willretirefromtheBoardatthe2019AGM. Iwouldliketotakethisopportunitytothank himforhissignificantcontributiontothe Boardoverthelastthreeandahalfyears, asaNon-executiveDirectorandamember oftheRiskandAuditCommittees.Iwould alsoliketowelcomeFieldsWicker-Miurin, whojoinedtheBoardin2018,andtothank AnneRichardsandBarryStowe,whoboth steppeddownduring2018,fortheir valuablecontributionstotheBoardand theGroup. Our customers and wider stakeholders Regardlessofthenatureoftheexternal environmentandthechangesweare makingtotheGroup,wemaintainour strongfocusondeliveringforour customers.InAsia,wearedeveloping innovativedigitalsolutions;intheUSwe areprovidingnewretirementpropositions; andintheUKwearemakingoursuccessful PruFundproductsincreasinglyavailableto peoplewhoarelookingforwaystoensure theirfinancialsecurityinretirement, includingthroughourdigitalplatform. Wearealsotakingactivestepstoensure thatwearepreparedfortheimpactofthe UK’sexitfromtheEuropeanUnion.Atthe sametime,weareusingourcustomers’ capitaltoinvestincompaniesand infrastructurearoundtheworld,driving economicgrowthandsupportingthe communitiesinwhichweoperate. TheBoardiscommittedtoensuringthat theGroupcontinuestomakeapositive socialandeconomicimpact.Inour Corporateresponsibilityreview,beginning onpage70ofthisAnnualReport,we provideanoverviewofourapproachasa responsiblecorporatecitizen.Moredetails canbefoundinour2018Environmental, socialandgovernancereport(ESG),which willbepublishedinMay. Our shareholders TheBoard’sroleistorepresentthe interestsofallshareholders.Aregular andfrankdialoguewithourshareholders ensuresweareresponsivetoourowners’ prioritiesandconcerns.Wehavean ongoingprogrammeofshareholder engagement,whichenablesustomake betterdecisionsbasedonthewell 02 Prudential plc AnnualReport2018 www.prudential.co.uk informedfeedbackwereceive.Ipersonally findthesediscussionshugelyvaluableand taketheideasandsuggestionsreceived veryseriously. Inaddition,policyandregulatorychange canhaveasignificanteffectonbothour operatingenvironmentandourcustomers. Wearecommittedtodeveloping constructiveandopenrelationshipswith alloursupervisors,aswellasgovernments andcivilsociety.Wearegratefulforthe constructiveengagementofourregulators duringthedemergerprocess,andthe Boardiscommittedtocontinuingtowork closelywiththem. Our people Prudentialhasalwaysbeenabusinessbuilt onourpeople.Itisthecommitment,drive andcreativityofourteamsinmarkets aroundtheworldthathasenabledusto delivertheseresultswhilemovingtowards ourdemerger.Thecommitmentofour peopletoourcustomersisinspiring,and understandingtheirneedsandprioritiesis afocalpointfortheBoard.Anenvironment wherewecontinuallydevelopourtalent, rewardgreatperformance,protectour peopleandvalueourdifferencesiskey todeliveringresultssuchasthese. Wearealsodeterminedtomakesureour peoplerepresentthediversecommunities weserve.Ensuringthatourcolleagues haveawiderangeofexperienceand viewpointsisvitaltooursuccess,andthe Boardhasmadediversityandinclusionone ofourstrategicpriorities.Thereismuchto dointhisarea,butIamencouragedbythe progresswehavemade. Iamalsoparticularlypleasedwiththeefforts somanyofourpeoplemakeinregardto communityinvolvement.Wehaveanactive programmeofcommunityinvestmentinour businessesaroundtheworld,withatotal contributionofover£27million.Ourprojects rangefromCha-Ching,thefinancial educationplatformaimedatprimary-school children,whichbeganinAsiaandisnow presentonallfourcontinentsonwhichwe operate,toPrudentialRideLondon,nowin itsseventhyear,whichhasraisedmorethan £66millionforcharity,plusourmanyother activitiesaroundsocialinclusion,education andlifeskillsanddisasterpreparedness. Akeypartofourcommunitycontributionis madebyourpeoplevolunteeringtheirtime andskillsforthebenefitoftheircommunities, andthismakesmeparticularlyproud. Isupportthisactivitypersonallythrough theChairman’sChallenge,ourflagship internationalvolunteeringprogramme, whichbringstogetherpeoplefromacrossthe Grouptogetinvolvedintheircommunities. In2018,morethan9,000ofourcolleagues aroundtheworldtookpartintheChairman’s Challenge,volunteeringover49,000hoursto support33differentprojects. Looking forward Wehavedeliveredsolidresultswhile makinggoodprogresstowardsasignificant changethatwebelievewillsecurethe long-termfutureforbothPrudentialplcand M&GPrudential.TheBoardisconfident thatshareholders,customersandallour stakeholderswillbenefitfromthecreationof thetwofocusedandinnovativecompanies thatwillresult,andthatwewillcontinue deliveringvaluewellintothefuture. Paul Manduca Chairman Bringing Money Smarts to kids across the US Since2017,theJacksonCharitableFoundation hasbeenhelpingAmericanstudentstoform betterfinancialhabitsfromtheyoungestages. Cha-Ching Money Smart Kidsmusicvideos andactivities,originallydevelopedby PrudentialCorporationAsia,arenowused inelementaryschoolsacrosstheUSwith programmesledbyclassroomteachersand communityvolunteers. PartneringwithJuniorAchievementUSA(JA), Cha-ChinghasbeenincorporatedintoJA’s thirdgradeclassroomcurriculumwhichis taughtinmorethan15,000classrooms annuallybycommunityvolunteers,including Jacksonassociates.TheFoundationhasalso teamedupwithDiscoveryEducationtomake Cha-Chingavailableatnocosttoteachers andfamiliesthroughstreamingservicesand www.cha-chingusa.org ‘Helpingchildrenlearnmoneymanagement conceptswhileengagingtheminfunand memorableactivitiespreparesthemfor apromisingfuture,’saidJackiePrester, BusinessandTechnologyTeacher, MansfieldPublicSchools,Massachusetts. ‘WithCha-Ching,weareputtingstudents onapathtofinancialfreedominadulthood, wheremoneysmarthabitscanpositively impacttheirfamilies,communitiesandlives.’ Betweenthesetwoefforts,Cha-Chinghas reachedmorethan2.6millionstudentssince 2017andcontinuestogrowinpopularity, teachingyoungpeoplehowto‘Earn,Save, SpendandDonate!’ www.prudential.co.uk AnnualReport2018 Prudential plc 03 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationGroup Chief Executive’s report – Mike Wells Capturing the structural opportunities ahead of us I am pleased to report that we have delivered another year of positive financial performance across the Group. Through the combination of our consistent strategy, our diversified portfolio of businesses and our disciplined execution, we have continued to produce high-quality earnings and deliver consistent returns for our investors and good outcomes for all our stakeholders. Ourpurposeistohelppeoplede-risktheir livesanddealwiththeirbiggestfinancial concerns.Whethertheyarestartinga family,savingforachild’seducationor planningforoldage,weprovidethem withthefreedomtofacethefuturewith confidencethroughourlong-termsavings andprotectionproducts,retirement incomesolutionsandassetmanagement capabilities.Atthesametime,weinvest ourcustomers’savingsintherealeconomy, helpingtodrivethecycleofgrowthand buildstrongercommunities. Weservethispurposethroughourclear, consistentstrategy,whichisfocusedon long-termstructuraltrendsandgivesus unrivalledaccesstotheworld’slargestand fastest-growingmarkets.InAsia,our distinguishedbrand,extensivefootprint andbroadproductanddistributionreach across14marketsleavesuswellpositioned toservethehealth,protectionandsavings needsoftherapidlygrowingand increasinglyaffluentpopulation.Weare alsoaleadingproviderofretirement productsintheUS,wherethenumberof peopleaged65andolderisexpectedto growfrom55millionin2020to72million by20301,andwearecontinuingto enhanceourproductsetanddistribution reachtocapturetheopportunityinthis market.IntheUKandEurope,where ageingpopulationsprovidegrowing demandformanagedsavingssolutions, M&GPrudentialistransformingitselfto meetthoseneedsinnewways.InAfrica wearebuildingapresenceinoneofthe world’smostunder-penetratedinsurance markets,withoperationsinfivemarkets. Wearecontinuingtodevelopourproduct offeringandimproveourcapabilitiesin ordertomeettheneedsofcustomersinall thesemarkets.Acrossourbusinesses,we arelisteningtoourcustomersandcreating newandbetterproductsinresponseto theirchangingneeds.Atthesametime,we areconstantlyupgradingourcapabilities, including,byinvestingindigitaltechnology thatenablesustomeetourcustomers’ needsmorequicklyandefficiently. InMarch2018,weannouncedour intentiontodemergeM&GPrudentialfrom theGroup,inordertocreatetwoseparately listedcompanieswithdistinctinvestment characteristicsandopportunities.Afterthe demerger,ourshareholderswillhave sharesinPrudentialplc,whichwillbeeven betterpositionedtocapturethestructural opportunitiesaheadofus,and M&GPrudential,withgreaterfreedomto deployitscapitalwhereandhowitlikesto meetthechangingneedsofcustomers. Wearemakinggoodprogresstowardsthe demerger.Onthestructuralside,wehave establishedtheholdingcompanyfor M&GPrudential,andwehavecompleted thefirststagesattheHighCourtofEngland andWalesforthetransferofpartofthe M&GPrudentialannuitybooktoRothesay. Ontheoperationalside,wearemoving forwardwithseparatingthefunctionsof thetwobusinessesandbuildingnewones toprepareM&GPrudentialforitspost- demergerfuture.Wehavealsoraised £1.6billionofsubordinateddebt,with substitutionclausestobeactivatedon demerger,supportingthecapital rebalancingofthetwobusinesses,and wecontinuetoworkwithourregulators. Our financial performance Ourfinancialperformancein2018reflects ourfocusonhighqualityexecutionofour strategy,andisagainledbyourbusiness inAsia. Asinpreviousyears,wecommentonour performanceinlocalcurrencyterms (expressedonaconstantexchangerate basis)toshowtheunderlyingbusiness trendsinperiodsofcurrencymovement. Newbusinessprofit2increasedby 11percent3to£3,877million(up7percent onanactualexchangeratebasis),driven bythefavourableimpactofourstrategic focusofincreasinghealthandprotection Operating profit* , 4 by business and currency mix %2018 38% Asia other 17% GBP 15% % US$ 40% US$ linked 28% 33% 29%  Asia  UnitedStates  M&GPrudential *Segmentalearningsofkeybusinessesandexcludes restructuringcostsandotherincomeandexpenditure. salesinAsia,thebenefitofhigherUS interestratesandaresilientperformance intheUKandEurope. GroupadjustedIFRSoperatingprofit basedonlonger-terminvestmentreturns4 (‘operatingprofit’)was6percent3higher at£4,827million(up3percentonanactual exchangeratebasis).Operatingprofit fromourAsialifeinsuranceandasset managementbusinessesgrewby 14percent3,reflectingcontinuedbroad- basedbusinessmomentumacrosstheregion andhigh-qualitysales,withover85percent ofoperatingincomefromourpreferred sourcesofinsuranceincome,feeincome andwith-profits.IntheUS,Jackson’stotal operatingprofitwas11percent3lower, withhigherfeeincomeoutweighedby anincreaseinmarket-relateddeferred acquisitioncosts(DAC)amortisation expenseandtheanticipatedreductionin spreadearnings.IntheUKandEurope, M&GPrudential’stotaloperatingprofitwas 04 Prudential plc AnnualReport2018 www.prudential.co.uk Innovation through partnership In2017,PrudentialSingaporeannounced acommitmenttotheMonetaryAuthority ofSingaporetobeaGrandSponsorofthe SingaporeFinTechFestivalfrom2018to2022, demonstratingourdedicationtofostering acultureofinnovation,collaborationand co-creationamongfinancialinstitutions, fintechcompaniesandregulatorsglobally. TheSingaporeFinTechFestivalisthelargest festivalofitskindintheworld,withthe2018 eventhostingmorethan250speakers,more than400exhibitorsand16international pavilions,anddrawingcloseto45,000 participantsfromalmost130countries. planningservicethatusessophisticated algorithmstopredictmoneyneedsacrossthe customer’slifetime,andPrudentialSingapore’s newPRUworksservice,whichprovides arangeoflegal,HRandemployeebenefit servicesforSMEsinoneconvenientapp. Singaporeisakeyinnovationtest-bedfor Prudentialasitharnessestechnologyto makeinsurancesimplerandmoreaccessible. Recognisingthatcustomersaredemanding greaterspeed,seamlessness,convenience andcontrolovertheirfinances,wehavebeen investinginunderstandingcustomers’needs moredeeplyandincreatingadistinctive Prudentialcustomerexperienceacross multipletouchpoints.Wearealsocreating digitaltoolstohelpourmorethan4,900 financialconsultantsinSingaporework moreefficientlyandserveourcustomers evenbetter. Prudential’sstandatthefestivalfeaturedsome newtoolspoweredbypartnershipsbetween Prudentialandlocalstart-ups.Initiativeson showincludedaninstanthealthcheckthrough anappthatdeterminesbodyfatusingpictures takenonamobilephone,anewfinancial 19percenthigherthantheprioryear,which principallyreflectsthebenefitfromupdated longevityassumptionsandan11percent5 increaseintheshareholdertransferfromthe with-profitsbusiness,whichincludes a30percent5increasefromPruFund. TheGroup’scapitalgenerationis underpinnedbyourlargeandgrowing in-forcebusinessportfolio,andfocuson profitablebusinesswithfastpaybackof capitalinvested.Overall,underlying freesurplusgeneration6increasedby 14percent3to£4,047millionandcash remittancestotheGroupfrombusiness unitswere£1,732million(2017: £1,788million).TheGroup’soverall performancesupporteda5percent increaseinthe2018fullyearordinary dividendto49.35pencepershare. TheGroupremainsrobustlycapitalised, witha2018year-endshareholder SolvencyIIcoverratio7,8of232percent. Overtheperiod,IFRSshareholders’funds increasedby7percentto£17.2billion, reflectingprofitaftertaxof£3,013million (2017:£2,390milliononanactual exchangeratebasis)andothermovements thatincludeddividendpaymentsto shareholdersof£1,244millionand favourableforeignexchangemovements of£348million.EEVshareholders’funds increasedby11percentto£49.8billion, equivalentto1,920pencepershare2,9. InAsia,wehavemaintainedourfocuson value,whilstcontinuingtodevelopour capabilitiesandreach,whichbuildscale andenhancequality.Ourstrategic emphasisonincreasingsalesfromhealth andprotectionbusinesshascontributed toa14percent3increaseinnewbusiness profitinAsia,andalsoreflecteda2percent3 growthinAPEsales.Ourgrowthinnew businessprofitwasbroad-based,with10 marketsdeliveringdouble-digitpercentage increases3.Ourassetmanagement business,EastspringInvestments,has continuedtogrow,withoperatingprofit up6percent3to£182million. IntheUS,Jacksonremainsfocusedon providingfinancialsecuritytoincreasing numbersofindividualsapproachingorin retirement,broadeningitsproductrange andextendingitsdistributionnetwork, includingnewrelationshipsannounced withStateFarm,EnvestnetandDPL FinancialPartners.In2018,highercharges fordeferredacquisitioncostsamortisation, largelyasaresultofequitymarket movementsintheyear,contributedto Jackson’soperatingprofitbeing11percent lower.USnewbusinessprofitincreasedby 5percent,asfavourablemovementsin interestratesandspreadassumptions balancedareductioninAPEsales. Jackson’shedgingprogrammesperformed asexpectedintheperiodofequitymarket weaknessexperiencedtowardstheend of2018,contributingtoanincreased risk-basedcapitalratioatyear-endof 458percent(2017:409percent). IntheUKandEurope,bothourlifeandasset managementbusinessesperformedwell in2018,withoperatingprofit19percent higherdrivenbyanumberofitemsthatare notexpectedtorecuratthesamelevel includingtheeffectfromupdatedlongevity assumptions.OurcorePruFundproposition continuestoperformwell,withnetinflows of£8.5billionandthePruFundcontribution toshareholderoperatingprofitincreasing 30percentto£55million.Newbusiness profitincreasedby3percent,broadlyin linewiththeincreaseinAPEsales. M&GPrudentialassetmanagementsawnet outflowsof£9.9billionfromexternalclients, includingtheexpectedredemptionofa single£6.5billionlowmargininstitutional mandate.OverallM&GPrudentialassets undermanagement10were£321billion (2017:£351billion),reflectingnetoutflowsat M&GPrudentialassetmanagementandthe impactofthe£12billionannuityreinsurance agreementannouncedinMarch2018. OurfinancialKeyPerformanceIndicators (KPIs)continuetoreflecttheoutcome oftheGroup’sstrategy.OurAsialife businessesaredrivenbygrowthinour recurringpremiumbaseandfocuson healthandprotectionbusiness.Elsewhere wearebenefitingfromourprioritisationof fee-generatingproductsacrossourAsia assetmanagement,USvariableannuity andUKandEuropeansavingsand investmentactivities. A clear and proven strategy Ourclear,provenstrategyiskeytoour long-termpositiveperformance,andis focusedonstrongandgrowing opportunitiesinAsia,theUS,theUKand EuropeandournascentmarketsinAfrica. InAsia,alargeandincreasinglywealthy populationwithlowlevelsofinsurance andassetmanagementcoverageis creatingahugeandfast-growingmarket forourhealth,protectionandsavings products.Asiaisdrivingglobal www.prudential.co.uk AnnualReport2018 Prudential plc 05 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationGroup Chief Executive’s report – Mike Wells continued growth,withaverageannualGDPgrowth inourAsialifemarketsof10.4percentin thedecadeto201711,comparedwithjust 1.9percentfortherestoftheworld11. Furthermore,despitepotentialheadwinds, between2017and2023Asiaisexpected todeliver39percentoftheworld’sGDP growth11.Thisiscreatingarapidlygrowing middleclassintheAsiaregion,whichis expectedtodoubleby2030toreach 3.5billionpeople12.Atthesametime, insurancepenetrationinAsiaisjust 2.7percentofGDP13,comparedwith 7.2percentintheUK13,leavingtheregion vastlyunder-insuredwithanestimated mortalityprotectiongapofUS$40trillion14 andahealthandprotectiongapof US$1.8trillion15.Similarly,mutualfund penetrationinAsiaisonly12percent16, comparedwith96percentintheUS16, whilst65percentofwealthinAsiaisheld incash17.Withprivatefinancialwealthin theregiongrowingbyUS$5trillionper year17,thereisconsiderablelatentdemand foroursavingssolutions.Thesestructural driversofgrowthareexpectedtopersist formanyyearstocomeandcreatea historicopportunityforus. Wearealsodevelopingourbusinesses inournewermarketsinAfrica,whichis oneoftheworld’smostunderservedlife markets,andwherethepopulationis forecasttogrowbyabillionby20451. Wearenowoperatinginfivecountriesin Africa–Ghana,Kenya,Nigeria,Uganda andZambia–whichwillincreasefurther withtheannouncedacquisitionofa majoritystakeinGroupBeneficial, andweareexcitedaboutthegrowing opportunitiesinthisdynamicregion. Wehaveastrongandgrowingopportunity intheUS.About40millionAmericansare expectedtoreachretirementageoverthe nextdecadealone.Atthesametime, 72percentofAmericanworkersdonot haveaccesstoadefinedbenefitretirement plan18.AstudyconductedbytheInsured RetirementInstituteandJacksonshowed that80percentofAmericansthinkthat socialsecuritywillnotprovideenough incomeforretirement19,andthesame percentagearewillingtopaymorefor guaranteedlifetimeincome19.Thisaligns withourretirementincomeproducts,which aredesignedtohelpcustomersavoid runningoutofmoneyandprovidethemwith areliablecushionagainstvolatilemarkets. IntheUKandEurope,notwithstandingthe uncertaintyrelatedtotheUK’sintended exitfromtheEuropeanUnion,a combinationofglobaltrendsand competitiveadvantagesiscreatinga powerfulopportunityforM&GPrudential. Thoseapproachingretirementhavebeen lookingfornewwaystoensurea comfortablefuture,andsincepensions freedomswereintroducedintheUKin 2015thatdemandhasbeenincreasing.At thesametime,thetotalvalueofhousehold cashdepositsintheEUisestimatedat ¤10trillion20,indicatingthescaleofthe opportunityforassetmanagementinthe region.Privateassetsundermanagement areexpectednearlytodoublebetween 2017and202321.M&GPrudential,which alreadyhasestablishedinternational distribution,aclearfocusoncustomer solutionsandabroad-ranginginvestment capability,istransformingitselftomeet thisopportunity. New and better ways to serve customers Wearecontinuingtoimprovethewaywe serveourcustomersineverypartofthe worldinwhichweoperate.Weconstantly updateourproductsandourcapabilities toensurethatwearefulfillingourpurpose andmaximisingtheeffectofourstrategy. InAsia,wearecontinuingtodevelopand expandourproducts,distribution capabilitiesandfootprintandtomeetthe evolvingneedsofourcustomers.During 2018,webroadenedourproductsuiteto includetailoredpropositionsforthe high-net-worthandcorporatesegments anddevelopednewproductsforcustomers withspecificneeds,suchaspre-existing medicalconditions.Ourdistribution capabilitieswereenhancedbynewdigital technologyandprovideaseamlessand differentiatedcustomerexperiencefrom pointofsalethroughtomakingaclaim. AtEastspring,wealsocontinuedtoroll outBlackRock’sAladdinsystemacross ourmarketstoimproveefficiency.We broadenedourreachthroughnew partnershipswithleadingbanksin severalmarkets,includingThailandand thePhilippines.Meanwhile,Eastspring consolidateditspositionastheleading retailassetmanagerinAsia(excluding Japan)byestablishinganon-the-ground presenceinChinaandThailand.Earlyin 2019,wealsorenewedoursuccessful regionalstrategicalliancewithUnited OverseasBank(UOB),oneofourmost successfuldistributionrelationshipsin South-eastAsia,until2034andadded VietnamandUOB’sdigitalbanktoan existingpartnershippresenceinSingapore, Malaysia,ThailandandIndonesia. Wearealsoexpandingourfootprintin ourAfricamarkets.InAugust2018,we extendedourlong-termpartnershipwith Prudential,forthesecondyearinarow, wontheinsurancecategoryofManagement Today’s‘Britain’sMostAdmiredCompanies’ awardsinDecember2018. StandardCharteredBank,whichhasbeen ahugesuccessinAsia,toGhana,andin Novemberwesignedalong-termexclusive partnershipwithZambiaNational CommercialBankPlc(Zanaco),Zambia’s largestbank,toenableourmarket-leading productstobeofferedtomorethan amillionnewcustomersacrossthecountry. IntheUS,wehavealonganddurabletrack recordofdeliveringfinancialsuccessforour consumers.Weareofferingnewproducts forfee-basedadvisersandhavelaunched newversionsofourfee-basedvariable annuities.Wearechangingthenarrative aroundretirementandlifetimeincome, demonstratingthevaluepropositionof ourproductstoregulators,investors, policyholdersandinfluentialindustry figures.InSeptember,weannouncedour collaborationwiththeEnvestnetInsurance Exchange,toofferourproductsonits platform.InOctober,weannouncedakey distributionpartnershipwithStateFarm, furtherstrengtheningourmarket-leading distributionfootprint.Earlyin2019,we partneredwithDPLFinancialPartnersto provideourprotectedlifetimesolutionsto independentregisteredinvestmentadvisers (RIA),providingaccesstonewopportunities intheindependentRIAchannel. IntheUKandEurope,asM&GPrudential preparesforthedemerger,wehavebeen continuingtotransformwhatwedoforour customersandhowwedoit.OurPruFund 06 Prudential plc AnnualReport2018 www.prudential.co.uk offeringcontinuestoimpresscustomers withitscombinationofclarity,capital growthandlowervolatility.Weare investingtotransformtheexperienceof ourfast-growingdigitalplatform,launched in2016,toensureitoffersacomprehensive rangeofsolutionsforcustomers.Inour investmentmanagementbusiness,we continuetodevelopourprivateasset capacityandnowhave£59billionof privateassetsundermanagement,making usoneofthelargestprivatecreditinvestors intheworld,andwearelookingtoexpand ourdifferentiatedcapabilitiesacross geographiesandassetclasses.In2018, M&GPrudentialalsosignedanew partnershipwithTataConsultancy Services(TCS),agloballeaderinIT, businessprocessanddigitalservices,to enhanceserviceforourUKandEurope savingsandretirementcustomers. Throughoutourbusinesses,weare continuingtodevelopourdigital capabilities.InAsia,suchinitiativesare enablingustoprovidevaluableand innovativeservicestoourcustomers. InAugust,weannouncedourexclusive partnershipagreementwiththeUK-based healthcaretechnologyandservices companyBabylonHealth.Throughthe deploymentofcutting-edgeartificial intelligencetechnology,thispartnership willoffercustomers,inupto12ofour marketsinAsia,accesstoacomprehensive setofdigitalhealthtools,complementing PrudentialCorporationAsia’sexistingsuite ofworld-classprotectionproductsand strengtheningourdigitalfuture.Similarly, atEastspring,ourrobo-adviceplatformin Taiwan,inpartnershipwithAlkanza,helps ourclientsmeettheirsavingsgoals.We recognisethattechnologycontinually Notes 1 UnitedNations,DepartmentofEconomicandSocialAffairs, PopulationDivision(2017).WorldPopulationProspects: The2017Revision.Americanpopulationreaching retirementageoverthenextdecadeisbasedon2019 population,aged55to64. 2 Embeddedvaluereportingprovidesinvestorswitha measureofthefutureprofitstreamsoftheGroup.TheEEV basisresultshavebeenpreparedinaccordancewithEEV principlesdiscussedinnote1ofEEVbasisresults.Seenote IIIoftheAdditionalunauditedfinancialinformationfor definitionandreconciliationtoIFRSbalances. evolvesandweembracethepossibilities thatlieahead.Oursponsorshipof Singapore’sFinTechFestival,whichin2018 hadmorethan400exhibitorsfrom35 countries,showcasingtheverylatestin digitalinnovation,istestamenttothisand presentsallkindsofpartnership possibilities.Indeed,ourSingapore businesshassincepartneredwiththreeof thepropositionsshowcasedattheevent. Our leadership InJuly2018,weannouncedthatAnne RichardswasresigningasChiefExecutiveof M&GandfromtheGroup’sBoard.Iwould liketothankAnneforhercontributionto theGroup’scontinuedsuccess.InOctober 2018,weannouncedthatBarryStowehad decidedtoretireasChairmanandChief ExecutiveOfficerofJacksonandasan ExecutiveDirectoroftheGroup.Barry madeanexceptionalcontributionoverhis 12yearsattheGroup,firstatourAsia business,whichunderhisleadershipgrew tobecomethemarket-leadingoperationit istoday,andintheUSsince2015.Barry hasbeensucceededatJacksonbyMichael Falcon.FormerlyCEOofAsiaPacificforJP MorganAssetManagement,Michaelhas deepexpertiseandanimpressivetrack recordintheindustryandiswellplacedto leadthenextphaseofourdevelopmentin NorthAmerica.Wecontinuetoinvestinthe rightpeopleatalllevelsacrosstheGroup. Delivering value into the future Ourclearstrategy,disciplineandimproving capabilitieshaveenabledustodeliver abroad-basedfinancialperformancein2018, basedonaclosefocusonourcorepurposeof helpingpeopletode-risktheirlivesanddeal withtheirbiggestfinancialconcerns.InAsia wecontinuetoseeastrongrunwayforthe insuranceandassetmanagementindustries, andourpresence,scaleanddistribution reachpositionuswelltoparticipatestrongly inthisgrowth.IntheUS,wecontinueto provideAmericanswiththeretirement strategiestheyneed,andweareconfident thatthiswillenableustocaptureadditional growthintothefuture.IntheUKandEurope, wewillcontinuetoimproveservicelevelsand launchnewofferings,andwearemaking goodprogresstowardstheintended demergerofM&GPrudentialfromtheGroup, whichwillresultintwodistinctbusinesses thatareabletofocusmoreclearlyonthe opportunitiesopentous.Wehavean establishedtrackrecordofdelivering importantbenefitstoourcustomersand profitablegrowthtoourshareholders. Iamconfidentthat,postdemergeras independentcompanies,bothPrudentialplc andM&GPrudentialwillbepositionedto continuetodowellinthefuture. Mike Wells Group Chief Executive 7 TheGroupshareholdercapitalpositionexcludesthe contributiontoOwnFundsandtheSolvencyCapital Requirementfromringfencedwith-profitfundsandstaff pensionschemesinsurplus.Theestimatedsolvency positionsincludemanagement’scalculationofUK transitionalmeasuresreflectingoperatingandmarket conditionsateachvaluationdate,whichforboth2018 and2017reflectstheapprovedregulatoryposition. 8 Estimatedbeforeallowingforsecondinterimordinary 14SwissReMortalityProtectionGapAsiaPacific2018. RepresentsPrudentialCorporationAsia’slifebusiness footprint,andusepercapitaincomeofworkingpopulation asthebaseunittocalculatethesizeofthegap. 15 SwissReAsia’shealthprotectiongap:insightsforbuilding greaterresilience.October2018.RepresentsChina, India,Japan,Korea,Indonesia,Malaysia,Taiwan,Vietnam, thePhilippines,Singapore,HongKongandThailand. 16InvestmentCompanyInstitute,industryassociations dividend. andLipper. 9 SeenoteIIIoftheAdditionalunauditedfinancialinformation 17 BCGGlobalWealth2017.NavigatingtheNewClient 3 Year-on-yearpercentageincreasesarestatedonaconstant fordefinitionandreconciliationtoIFRSbalances. Landscape. exchangeratebasisunlessotherwisestated. 4 AdjustedIFRSoperatingprofitbasedonlonger-term investmentreturnsismanagement’sprimarymeasureof profitabilityandprovidesanunderlyingoperatingresult basedonlonger-terminvestmentreturnsandexcludes non-operatingitems.Furtherinformationonitsdefinition andreconciliationtoprofitfortheperiodissetoutinnote B1oftheIFRSfinancialstatements. 5 Growthrateonanactualexchangeratebasis. 6 Forinsuranceoperations,underlyingfreesurplusgenerated representsamountsmaturingfromthein-forcebusiness duringtheperiodlessinvestmentinnewbusinessand excludesnon-operatingitems.Forassetmanagement businessesitequatestopost-taxoperatingprofitforthe period.Restructuringcostsarepresentedseparatelyfrom theunderlyingbusinessunitamount.Furtherinformation issetoutinnote10oftheEEVbasisresults. 10RepresentsM&GPrudentialassetmanagementexternal fundsundermanagementandinternalfundsincluded ontheM&GPrudentiallong-terminsurancebusiness balancesheet. 11 IMF.2017GDPatJanuary2019currentprices. AsiarepresentsPrudentialCorporationAsia’slife businessfootprint. 12 BrookingsInstitution.GlobalEconomy&Development WorkingPaper100.February2017.‘Asia’represents AsiaPacific. 13 Insurancepenetration–SwissReSigmaNo3/2018. Insurancepenetrationcalculatedaspremiumsasa percentageofGDP.Asiapenetrationcalculatedona weightedpopulationbasis. 18U.S.BureauofLaborStatistics,NationalCompensation. Survey:EmployeeBenefitsintheUnitedStates,March 2017.Workersdefinedasthoseemployedinprivate industryandstateandlocalgovernment. 19TheLanguageofRetirement2017–studyconducted onbehalfoftheInsuredRetirementInstituteandJackson. 20Eurostat:Householddepositdata. 21PreqinFutureofAlternativesReport,October2018. www.prudential.co.uk AnnualReport2018 Prudential plc 07 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information08  Prudential plc  Annual Report 2018  www.prudential.co.uk 02 Strategic report At a glance Our business model Our distribution Demerger update Our performance Our businesses Asia United States M&GPrudential Chief Financial Officer’s report on the 2018 financial performance Group Chief Risk Officer’s report of the risks facing our business and how these are managed Corporate responsibility review Page 10 12 14 15 16 18 18 26 32 38 52 70 www.prudential.co.uk  Annual Report 2018  Prudential plc  09 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationAt a glance Group at a glance We meet the long-term savings and protection needs of a growing middle-class and ageing population. We focus on markets where the need for our products is strong and growing and we use our capabilities, footprint and scale to meet that need. In 2018 the Group announced its intention to demerge its UK and Europe business, M&GPrudential, from Prudential plc, which will result in two separately listed companies, with different investment characteristics and opportunities. We have always been clear about the importance of creating optionality in our corporate structure, and decided to exercise one of those options in the interests of both the business and all of our stakeholders. Our purpose Prudential helps people de-risk their lives and deal with their biggest financial concerns. Our strategy Our strategy is to capture the long-term  structural opportunities within our  markets, operating with discipline and  enhancing capabilities through  innovation to deliver high-quality  resilient outcomes for our customers. We aim to do this by:  — Serving the protection and investment  needs of the growing middle class in Asia;  — Providing asset accumulation and   retirement income products to US retirees;   — Offering products to new customers in  Africa, one of the fastest-growing regions  in the world; and  — Meeting the savings and retirement   needs of an ageing UK and continental  European population. We aim to generate attractive returns  enabling us to provide financial security   to our customers and deliver sustainable  growth for our shareholders. Following  rigorous review, we believe that this  long-term strategy is best served through  the intended demerger of M&GPrudential.  The demerger will enable both businesses  to continue to deliver on our customer and  stakeholder commitments, but without  the requirement to compete for resources  and capital internally. 10  Prudential plc  Annual Report 2018  www.prudential.co.uk total funds under management £657 billion 26 million customers worldwide Asia Leading pan-regional franchise £151bn assets under management 94% of APE sales are regular premium £1.2bn underlying free surplus generation United States Premier retirement income player US$163bn separate account assets US$2.2bn variable annuity net inflows £2.4bn fee income Africa M&GPrudential Long-term conviction-led investment approach £43bn total PruFund funds under management Operating in 29 markets £321bn total M&GPrudential funds under management1 Structural growth over the last two decades has allowed our non-European business to reach the scale where it has the ability to self-fund its own long-term goals through disciplined capital allocation. Prudential plc has a diversified, but highly complementary, portfolio of businesses with access to the world’s largest and fastest-growing markets. Prudential Corporation Asia has leading insurance and asset  management operations across 14 markets which serve the families  of the region’s high potential economies. We have been operating in  Asia for over 90 years and have built high-performing businesses  with multichannel distribution, a product portfolio centred on  regular savings and protection, award-winning customer service  and a widely recognised brand. Eastspring Investments is a leading asset manager in Asia and  provides investment solutions across a broad range of asset classes. Jackson provides retirement savings and income strategies aimed  at the large number of people approaching retirement in the  United States. Jackson’s pursuit of excellence in product  innovation and distinctive distribution capabilities has helped us  forge a solid reputation for meeting the needs of customers.  Jackson’s variable annuities offer a distinct retirement solution  designed to provide a variety of investment choices to help  customers pursue their financial goals. We entered Africa in 2014, to offer products to new customers in  one of the fastest-growing regions in the world. We aim to provide  products that help our customers to live longer and healthier lives,  and save to improve future choices for them and their families. The formation of M&GPrudential, the joining of two well recognised brands with a strong track record, has created a leading savings and investment business, ideally positioned to target growing customer demand for financial solutions in the UK and Europe. With over 6 million clients across 29 markets and £321 billion1 in  assets under management, M&GPrudential’s vision is a business  built for the customer which is simple, efficient, digitally enabled,  capital-light, fast-growing and, above all, focused on delivery. The combined business benefits from two strong complementary  brands, a world-class investment capability, international  distribution and a robust capital position. 1  Represents M&GPrudential asset management external funds under management and  internal funds included on the M&GPrudential long-term insurance balance sheet. www.prudential.co.uk  Annual Report 2018  Prudential plc  11 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationOur business model Evolving to serve the future customer Our trusted brands and strong distribution channels enable us to understand the growing needs of our customers for long-term savings and financial security, and to design innovative products that meet those needs. By helping to build better lives and stronger communities and to fuel the growth cycle, we create long-term value for both our customers and our shareholders. Capturing structural opportunity ... through enhanced capabilities Serving customer needs Asia  — Low life insurance and mutual fund penetration  — Significant health and protection gap  — Growing working age population  — Increasing consumer affluence  Our businesses page 18 United States  — Increase in retirement age population  — Large and growing retirement asset pools  — Growing demand for guaranteed income  Our businesses page 26 M&GPrudential  — Ageing population  — Large and growing retirement asset pools  — Growing demand for saving and income  Our businesses page 32 Customer service Customers are at the heart of our strategy. We proactively listen to  both new and existing customers to understand and respond to their  changing needs. This allows us to propose financial solutions  customised for different groups, whether that is young and  middle-aged people or those in the retirement phase of life. We  are expanding our digital infrastructure to enhance our customer  experience. Solutions We offer solutions for customers as they face the biggest financial  challenges of their lives. We consistently develop our product  portfolio, designing it around our customers’ needs and providing  them with peace of mind, whether that be in relation to saving  for retirement or insuring against risks of illness, death or critical  life events. Distribution Distribution plays a key role in our ability to reach, attract and  retain customers in different parts of the world. Building out and  diversifying our distribution capabilities, including adding digital  tools, helps ensure that we fully capitalise on the opportunities  available to us in each of our markets. Investment for growth We focus on strategic investment in long-term opportunities and  capabilities to drive future growth and value for our stakeholders.  We invest to improve relationships with our customers and  distributors, to  create innovative products, to improve our  operating platforms and to capture new opportunities and build  new relationships. We invest in digital capabilities to empower  our distributors and improve customer service. Risk management We generate value by selectively taking exposures to risks that are  adequately rewarded and that can be appropriately quantified and  managed. Balance sheet strength and proactive risk management  enable us to make good our promises to our customers and create  long-term value for our stakeholders.  Group Chief Risk Officer’s report of the risks facing our business  and how these are managed page 52 12  Prudential plc  Annual Report 2018  www.prudential.co.uk ... creating high-quality outcomes ... for our stakeholders. We create financial benefits for our investors and deliver  economic and social benefits for our customers, our  employees and the societies in which we operate. Customers Providing financial security and wealth creation. Read more on pages 18 to 37 Investors  Growing dividends and share price performance enhance  shareholder value. Read more on pages 16 to 86 Employees  Providing an environment with equal opportunities, career  potential and rewards, enabling us to attract and retain  high-quality individuals to deliver our strategy. Read more on pages 78 to 80 Communities  Supporting communities where we operate, through  investment in business and infrastructure, tax revenues  and community support activities. Read more on pages 80 to 85 Growth £4,827m Operating profit1 +6%2 on 2017 £3,877m New business profit +11%2 on 2017 £7,563m EEV operating profit +19%2 on 2017 Cash £4,047m Free surplus generation +14%2 on 2017 £1,732m Remittances -3%3 on 2017 Capital £17.2bn Solvency II surplus +29%3 on 2017 232% Solvency II cover ratio +30pp on 2017  The Group has a number of key performance indicators internally  to measure financial performance. Read more on page 16 Notes 1  Adjusted IFRS operating profit based on longer-term investment returns. 2  Growth rates on a constant exchange rate basis. 3  Growth rates on an actual exchange rate basis. www.prudential.co.uk  Annual Report 2018  Prudential plc  13 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationOur distribution Our global distribution strength We respond to the needs of our global customers through diverse and robust distribution channels in all our markets. Jackson Strength and flexibility of our distribution network gives us a distinctive advantage Largest and most productive VA wholesale distribution  force in the US1 +700 broker-dealers’ selling agreements covering +230,000  (74%) of total US advisers2 #1 selling variable annuity contract3 in the independent  channel since 2003 4 million customers Prudential Corporation Asia Pan-regional multi-channel network +600,000 agents Multiple established bank partnerships Access to +14,000 bank outlets Eastspring Investments are present in 11 Asia markets and  distribution offices in US and Europe +15 million life customers Prudential Africa M&GPrudential Establishing network with market-leading initiatives +4,000 agents Diversified distribution model underpinned by two complementary brands £321 billion total assets under management4 6 exclusive bank partners Operating in 29 markets around the world Access to over 600 bank branches +6 million customers 2 mobile telecommunications partners +300 Prudential Financial Planning partners +500,000 customers Notes 1  Independent research and Market Metrics, a Strategic Insight Business: U.S. Advisor Metrics  2018, as of 30 September 2018. 2  The Cerulli Report Adviser Metrics 2018 and Jackson research. 3  ©2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to  Morningstar and/or its content providers; (2) is not warranted to be accurate, complete, or timely.  Neither Morningstar nor its content providers are responsible for any damages or losses arising  from any use of this information. Past performance is no guarantee of future results. Morningstar  www.AnnuityIntel.com. Total Sales by Company & by Contract 3Q YTD 2018. Jackson ranks #1  out of 725 VA contracts with reported sales in the Independent Channel in 3Q YTD 2018. 4  Represents M&GPrudential asset management external funds under management and  internal funds included on the M&GPrudential long-term insurance business balance sheet. 14  Prudential plc  Annual Report 2018  www.prudential.co.uk Demerger update Creating two leading companies We are aiming to create two separately listed companies with distinct investment prospects, capital allocation priorities and customer needs. M&GPrudential, one of the leading savings and investments businesses in the UK and Europe, will be an independent, capital-efficient business, headquartered and premium-listed in London. Prudential plc will continue to combine the exciting growth potential of our Asia, US and Africa businesses, as a leading international insurance and asset management group. We will also remain headquartered and premium listed in London. Prudential plc M&GPrudential Prudential Corporation Asia Prudential Africa Jackson Prudential UK & Europe M&G Investments Chief Executive Officer: Mike Wells Headquarters: London Premium listing: London Stock Exchange Other listings: Hong Kong (Primary), Singapore, New York Chief Executive Officer: John Foley Headquarters: London Premium listing (intended): London Stock Exchange Frequently asked questions What is the rationale for the demerger? Following separation, M&GPrudential  will have more control over its business  strategy and capital allocation. This will  enable it to play a greater role in developing  the savings and retirement markets in  the UK and Europe through two of the  financial sector’s most trusted brands,  M&G and Prudential, while Prudential plc  will be able to focus on the attractive  returns and growth potential of its  market-leading businesses in Asia and  the US. Will the businesses stay in the UK? Both businesses will be headquartered in  the UK, and premium-listed on the London  Stock Exchange. We expect both businesses  will meet the criteria for inclusion in the FTSE  100 index.   How are we progressing? In preparation for the demerger, we have  already completed a number of key steps,  including:  — We announced that the Hong Kong  Insurance Authority would be the  Group-wide supervisor after the  demerger of M&GPrudential;  — We raised £1.6 billion of debt in  September 2018. This debt issuance  contained a substitution clause, allowing  us to substitute M&GPrudential for  Prudential plc as the issuer;   — We established a new holding company  for M&GPrudential and completed the  transfer of the legal ownership of The  Prudential Assurance Company Limited  and M&G Group Limited to this company;  — We announced the independent Chair  of M&GPrudential in October 2018; and  — We completed the transfer of the legal  ownership of our Hong Kong insurance  subsidiaries from The Prudential  Assurance Company Limited  (M&GPrudential’s UK-regulated  insurance entity) to Prudential  Corporation Asia Limited. When will it happen? We are making good progress on  the workstreams to enable the legal,  operational and financial separation of  the businesses and we are committed  to delivery with best execution. We will  provide more details on timing when  it is appropriate to do so.  What will happen to your shares? Shareholders will retain their shares in  Prudential plc and, if the demerger  completes, receive shares in a separately  listed M&GPrudential. www.prudential.co.uk  Annual Report 2018  Prudential plc  15 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationOur performance Measuring our performance To create sustainable economic value for our shareholders we focus on delivering growth and cash while maintaining appropriate capital. Profit, cash and capital1 Prudential takes a balanced approach to performance management across IFRS, EEV  and cash. We aim to demonstrate how we generate profit under different accounting  bases, reflecting the returns we generate on capital invested, and the cash generation  of our business. Adjusted IFRS operating profit based on longer-term investment returns2 £m The Group’s business involves entering into  long-term contracts with customers, and  hence the Group manages its associated  assets and liabilities over a longer-term time  horizon. This enables the Group to manage  a degree of short-term market volatility.  Therefore operating profit based on  longer-term investment returns gives  a more relevant measure of the performance  of the business. Other items are excluded  from operating profit to allow more relevant  period-on-period comparisons of the trading  operations of the Group, eg the effects of  corporate transactions are excluded. Group operating profit in 2018 is 6 per cent  higher on a constant exchange rate basis  (3 per cent on an actual exchange rate  basis), compared with 2017. Operating  profit from Asia life and asset management  operations was up 14 per cent on a constant  exchange rate basis (10 per cent on an actual  exchange rate basis), and M&GPrudential  was up 19 per cent. In the US, operating  profit was down 11 per cent on a constant  exchange rate basis (14 per cent on an  actual exchange rate basis) reflecting higher  market-related deferred acquisition  costs amortisation. EEV new business profit3 £m Life insurance products are, by their  nature, long term and generate profit  over a number of years. Embedded value  reporting provides investors with a measure  of the future profit streams of the Group.  EEV new business profit reflects the value  of future profit streams which are not  fully captured in the year of sale under  IFRS reporting. EEV new business profit in 2018 increased  by 11 per cent on a constant exchange  rate basis (7 per cent on an actual exchange  rate basis) compared with 2017, driven by  increases in health and protection business  and pricing actions in Asia, higher interest  rates and spread assumption changes in  the US and M&GPrudential PruFund based  Retirement Account sales. 1 % C A G R + 1 4,699 4,827 3,969 4,256 3,154 2014 2015 2016 2017 2018 8 % C A G R + 1 3,616 3,877 3,088 2,492 2,021 2014 2015 2016 2017 2018 EEV operating profit3 £m EEV operating profit is provided as an  additional measure of profitability. This  measure includes EEV new business profit,  the change in the value of the Group’s  long-term in-force business, and profit  from our asset management and other  businesses. As with IFRS, EEV operating  profit reflects the underlying results based  on longer-term investment returns. Group EEV operating profit in 2018  increased by 19 per cent on a constant  exchange rate basis (15 per cent on an  actual exchange rate basis), compared  with 2017, driven by higher new business  profit and higher contributions from the  in-force business. 6 % C A G R + 1 7,563 6,598 5,497 4,840 4,108 2014 2015 2016 2017 2018 16  Prudential plc  Annual Report 2018  www.prudential.co.uk Group free surplus generation4 £m Free surplus generation is used to measure  the internal cash generation of our business  units. For insurance operations, it represents  amounts maturing from the in-force business  during the period, less investment in new  business and excludes other non-operating  items. For asset management, it equates to  post-tax operating profit for the year. Overall, underlying free surplus generation  increased by 14 per cent on a constant  exchange rate basis (11 per cent on an Business unit remittances5 £m Remittances measure the cash transferred  from business units to the Group. Cash flows  across the Group reflect our aim of achieving  a balance between ensuring sufficient net  remittances from business units to cover the  dividend (after corporate costs) and the use  of cash for reinvestment in profitable  opportunities available to the Group. actual exchange rate basis), reflecting good  performance in each of our businesses with  Asia up 14 per cent on a constant exchange  rate basis (9 per cent on an actual exchange  rate basis), the US up 11 per cent on  a constant exchange rate basis (7 per cent  on an actual exchange rate basis) and  M&GPrudential up 21 per cent, including  the positive impact of longevity assumption  changes and an insurance recovery on  annuity review costs. 2 % C A G R + 1 3,566 3,640 4,047 3,025 2,553 2014 2015 2016 2017 2018 Total remittances to the Group decreased  by 3 per cent in 2018, compared with  2017. Remittances from Asia, increased,  demonstrating the quality and scale of its  growth. Remittances from the US were  £342 million. Remittances from  M&GPrudential increased by 2 per cent. Group Solvency II capital surplus6,7 £bn Prudential is subject to the risk-sensitive  solvency framework required under  European Solvency II Directives  (Solvency II) as implemented by the  Prudential Regulation Authority in the  UK. The Solvency II surplus represents the  aggregated capital (own funds) held by the  Group, less solvency capital requirements. The high quality and recurring nature of  our operating capital generation, beneficial  effects of debt issued and disciplined  approach to managing balance sheet  risks are reflected in the solvency capital  surplus, which increased to £17.2 billion  at 31 December 2018. 1,625 1,482 1,718 1,788 1,732 2014 2015 2016 2017 2018 17.2 12.5 13.3 9.7 2015 2016 2017 2018 Notes 1  The comparative results shown above have been prepared  using an actual exchange rate (AER) basis except where  otherwise stated. Comparative results on a constant  exchange rate (CER) basis are also shown in financial tables  in the Chief Financial Officer’s report on our 2018 financial  performance. CAGR is compound annual growth rate. 2  Adjusted IFRS operating profit based on longer-term  investment returns is management’s primary measure of  profitability and provides an underlying operating result  based on longer-term investment returns and excludes  non-operating items. See note III of Additional unaudited  financial information for definition and reconciliation to  IFRS balances. 3  The EEV basis results have been prepared in accordance  with EEV principles discussed in note 1 of the EEV basis  results. See note III of Additional unaudited financial  information for definition and reconciliation to  IFRS balances.  4  For insurance operations, underlying free surplus generated  represents amounts maturing from the in-force business  during the period less investment in new business and  excludes non-operating items. For asset management  businesses, it equates to post-tax operating profit for the  period. Restructuring costs are presented separately from  the underlying business unit amount. Further information  is set out in note 10 of the EEV basis results. 5  Cash remitted to the Group forms part of the net cash flows  of the holding company. A full holding company cash flow  is set out in note II (a) of the Additional unaudited IFRS  financial information. This differs from the IFRS  Consolidated Statement of Cash Flows which includes all  cash flows relating to both policyholders’ and shareholders’  funds. The holding company cash flow is therefore a more  meaningful indicator of the Group’s central liquidity. 6  The Group shareholder capital position excludes the  contribution to Own Funds and the Solvency Capital  Requirement from ring fenced with-profit funds and  staff pension schemes in surplus. The estimated solvency  positions include management’s calculation of UK  transitional measures reflecting operating and market  conditions at each valuation date, which for both 2018  and 2017 reflects the approved regulatory position. 7  Estimated before allowing for second interim ordinary  dividend. www.prudential.co.uk  Annual Report 2018  Prudential plc  17 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationAsia 2018 performance highlights — Continued performance in key metrics: new business profit up 14 per cent1, operating profit up 14 per cent1 and underlying free surplus generation up 14 per cent1 — Developed over 160 products in 2018 and added 1.4 million new life customers2 — Signed an exclusive partnership with Babylon Health to provide AI-powered digital health services in up to 12 markets across Asia — Established Eastspring’s wholly foreign-owned enterprise in Shanghai and extended our asset management presence to Thailand, following the acquisition of TMB Asset Management — Continued expansion in China, following entry into Hunan province and 10 new cities — Retained Eastspring’s ‘Best Asia Fund House’ accolade in the AsianInvestor Asset Management Awards — In early 2019, we renewed and expanded our successful regional strategic bancassurance alliance with UOB 18  Prudential plc  Annual Report 2018  www.prudential.co.uk Our businesses Asia Continued progress against our strategic priorities, which align with the evolving and expanding sources of demand in Asia, leaves the business well positioned for sustained future growth. Our business It is 95 years since we established our first  operations in Asia. Our long heritage and  strong brand awareness form the  foundations of our business and today our  footprint spans 14 markets and encompasses  3.6 billion people. We have a top three  position in eight out of our 12 insurance  markets3 and Eastspring, our asset  management business, remains the largest  pan-regional retail asset manager in Asia,  excluding Japan. In addition, Eastspring  retained the prestigious ‘Best Asia Fund  House’ accolade in 2018, a feat that has now  been achieved in three of the past four years. We believe our commitment to customers on  ‘listening, understanding, delivering’ is a key  differentiator. To fulfil this, we adopt  a multi-channel strategy with over 600,000  agents, over 300 distribution partners and an  increasing online offering, enabling us to  serve our customers’ needs in their preferred  manner. We have a proven ability to attract,  develop and retain a talented and diverse  workforce, employing over 13,000 people  with more than 40 separate nationalities and  wide-ranging industry backgrounds. This  enables us to remain at the forefront  of product development, create innovative  services for our customers and embed digital  technology to drive efficiency. We are also able to translate these  hallmarks of our business into financial  success, with our strong performance in  2018 building upon our existing excellent  track record. Our gross premium earned  grew4 by 9 per cent1 to £16.5 billion, and  renewal premiums5 grew by 16 per cent1.  This helped deliver a 14 per cent1 increase  in operating profit6 to £2.2 billion and  grow our total assets by 11 per cent7  to £94.2 billion. We also delivered  14 per cent1 growth in new business profit8  to £2.6 billion and the total embedded  value of the business grew 16 per cent7 to  £24.3 billion. At Eastspring, we managed  funds totalling £151 billion at the end of  2018, invested in over 1,600 funds. Market opportunity In Asia, we provide insurance and asset  management solutions that enable  customers of all ages to address their  health, protection and savings needs.  Demand for our products is underpinned  by low levels of existing coverage and is  further supported by economic and  demographic tailwinds that look set to  persist over the coming decades. Today, consumers in Asia are both  under-insured and under-saved during  their working lives, which leaves them  inadequately prepared for retirement.  This is evident from the significant gap in  life insurance penetration rates compared  with developed markets. Furthermore,  the limited welfare social safety net in many  of our markets means that out-of-pocket  healthcare spend by people in Asia is three  to four times the proportion seen in the  US and UK. Collectively, these dynamics  resulted in an estimated health protection  gap of US$1.8 trillion in 2017 across the  Asia region9. The economic growth potential of the  region is widely recognised and is  expected to translate into rising levels  of affluence, with 88 per cent of the  next billion entrants into the middle class  predicted to be based in Asia10. Entering  the middle class is typically the trigger  for individuals to protect their health and  that of their families, while also seeking  to manage and grow their wealth. Indeed,  total annual expenditure by Asia’s middle  class is forecast to reach US$37 trillion  in 203010, more than double the current  amount. Asia’s economies are also benefiting  from a demographic dividend with  moderating fertility rates and improving  life expectancy. In youthful markets, such  as Indonesia, this is creating a surge in the  working age population and with that  a continued source of demand for our  Prudential life customer and population by age11,12   Prudential customer profile   Illustrative future profile   Population profile (Asia) 2018 2030 3.3bn Working age population 2.3bn Over 65s 286m 3.7bn Working age population 2.5bn Over 65s 448m <15 16- 20 21- 25 26- 30 31- 35 36- 40 41- 45 46- 50 51- 55 56- 60 61- 65 66- 70 71- 75 76- 80 >80 <15 16- 20 21- 25 26- 30 31- 35 36- 40 41- 45 46- 50 51- 55 56- 60 61- 65 66- 70 71- 75 76- 80 >80 www.prudential.co.uk  Annual Report 2018  Prudential plc  19 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Our businesses Asia continued Asia continued Middle class in Asia as a proportion of world middle class10   Asia middle class population   Middle class population   of the rest of the world 3,766m 2,023m 54% 3,030m 1,380m 46% 5,412m 3,492m 65% 4,617m 2,784m 60% 2015 2020 2025 2030 products. Across Asia the working age  population is forecast to grow by almost  one million people per month between  now and 2030 to 2.5 billion people11.  Meanwhile, the number of those aged over  65 is projected to almost treble by 2050 to  700 million11. This is expected to create  demand for new solutions in markets with  ageing populations, such as Hong Kong  and China, as individuals look to maintain  their standard of living during retirement. Whilst these trends provide an attractive  backdrop, we need to remain diligent and  focused in our execution as a wide range  of external developments can affect our  business. The escalating trade-related  tensions between the US and China  contributed to increased equity market  volatility in the second half of 2018. The  landmark election result in Malaysia  heralded the first change in governing  party since independence in 1957 and  we have been actively discussing how we  support the new leadership in their desire  to provide greater insurance access to the  Malaysian population. In China, there was  a step forwards in easing foreign  investment in the insurance sector, with  caps on foreign ownership expected to  be lifted by 2021. Alongside these  developments, regulators across the region  are seeking to reward disciplined risk- management practices by strengthening  consumer protection and migrating to  risk-based solvency frameworks. We are steadfast in our conviction that the  structural drivers of consumer demand in  this region are of greater significance to  our business than short-term market or  regulatory driven events. We also  recognise that the insurance industry  is not immune to the pervasive impact of  technology and the way this is shaping our  customers’ expectations and behaviours  with regards to accessibility, service and  overall experience. These perspectives are  instrumental in guiding the decisions we  take to position our business for future  success. Strategic priorities Our business achieves high risk-adjusted  returns by maintaining a disciplined focus  on value. Two key distinguishing features  of our sales mix are the contribution from  health and protection products, which  Prudential Corporation Asia is well positioned to benefit from long-term structural opportunities Customer segment Distribution channels Core products High-net-worth Consultants Estate planning  Robo-investment New Affluent Mass Emerging Group Agency Bank partners Unit linked  Return of premium  Multi-care multi-stage medical cover  Critical illness Existing New partners  Direct to consumer Corporate Term life  Health benefit  Micro credit Group term  Medical Personal accident New New collectively accounted for 70 per cent of  our new business profit in 2018, and the  high proportion of regular premiums,  which comprised 94 per cent of APE sales.  We favour this mix because it provides our  shareholders with a higher and more stable  return across market cycles. Our success in  health and protection is underpinned by  our comprehensive underwriting  processes, extensive experience and  technical capabilities of our in-house  professionals. Meanwhile, the high  proportion of regular premiums ensures we  collect a steady stream of revenues across  market cycles.  This focus on value is supported by four  strategic priorities that we believe align  with the evolving sources of demand  across the region and hence will position  our business for continued future growth.  We seek to enhance the core of our existing  business by improving our customers’  experience. Significantly, we have  extended our exclusive partnership with  UOB until the end of 2034 and, due to its  success to date, agreed to expand its scope  to include Vietnam and UOB’s digital bank.  We also continued to expand and diversify  our distribution reach with nine new bank  partnerships across six of our markets  being successfully activated during 2018,  including Siam Commercial Bank in  Thailand and O-Bank, the first digital bank  in Taiwan. The success of these  partnerships is underpinned by the quality  and competitiveness of our products, the  additional value-added services we offer to  customers and the digital tools and training  we provide to sales teams. We simplify the process of purchasing a  policy by embracing the latest technology  and embedding this within proprietary  tools used by our agents and bank  partners. For example, over 70 per cent of  all new business was submitted through  e-point-of-sale technology. Our smart  underwriting tool, which is now used in  59 per cent of all sales, provides dynamic  underwriting that streamlines the  application process, while also  communicating instant underwriting  decisions to customers.  We also use digital technology in servicing  policies, both to improve the efficiency of  our business and to enhance customer  satisfaction. In Hong Kong we developed  the ‘Hospital to Prudential’ portal to  redefine the way our customers and  medical professionals manage hospital  claims, reducing the time required to  submit a claim to just three minutes.  Meanwhile, in China we have extended  20  Prudential plc  Annual Report 2018  www.prudential.co.uk our award-winning WeChat self-service  platform to include 90 per cent of all policy  administration actions. Similarly, in  Thailand we created a new customer  services touchpoint through PruConnect,  which enables customers to quickly access  key information such as policy information,  premium certificates and nearby network  hospitals. Secondly, we want to create ‘best-in-class’ health capabilities and attained new  business profit growth of 15 per cent from  health and protection products in 2018.  Our strategy is supported by distinctive  value-added services, such as the exclusive  multi-year partnership we signed with  Babylon, a UK-based healthcare and  technology services company. This  partnership will provide personal health  assessments and treatment information,  powered by artificial intelligence, which  will transform health provision for our  customers. This will greatly enhance our  customers’ access to healthcare,  particularly for those in remote locations,  whilst empowering them to proactively  manage their health in a flexible and  cost-efficient manner.  Thirdly, we plan to accelerate Eastspring by  expanding its existing investment offering  and enhancing its distribution capabilities.  We have continued to strengthen our  in-house investment teams, which helped  us launch 51 new products in 2018. In  September, we also entered Thailand, the  largest mutual fund market in the  Association of Southeast Asian Nations  (ASEAN)13, with the acquisition of TMB  Asset Management. Our on-the-ground  Life weighted premium income14,15 £bn CER   In-force   New business PRUconnect PRUconnect, one of Prudential Thailand’s  latest offerings, is aimed at extending online  customer service via LINE, a popular  instant-communication mobile application  in Thailand with more than 44 million active  users. Launched in January 2018,  PRUconnect provides policyholders with  a dedicated web portal where they can  access policy information, make premium  payments, download premium certificates  and locate nearby network hospitals, as well  as a range of other self-service options. PRUconnect also includes a chatbot feature,  which uses artificial intelligence to simulate  natural conversations. Customers can  submit simple enquiries to the PRUchat  bot via the LINE app, and stay connected  to the company for assistance anytime  and anywhere. team recently launched an Asia Pacific  Property Flexible Fund that obtained  inflows totalling US$91 million during the  week-long initial public offering period. Finally, we intend to expand our presence in China across both the insurance and  asset management sectors. We recently  established a new branch in Hunan and  received regulatory approval to undertake  preparatory work to establish a new branch  in Shaanxi, our nineteenth and twentieth  provinces, respectively, offering access to  over 100 million new people. This  geographic expansion is supported by the  diligent growth in our agency force, which  grew by 7 per cent in 2018 to 48,000  agents. We also formed a two-year  research partnership with the  Development Research Centre of the State  Council focused on the development of a  sustainable pension system, which is  testament to our aspirations in this market  and our differentiated capabilities. Another  major milestone in China was the opening  of Eastspring’s wholly foreign-owned  enterprise in Shanghai. This enables us to  manage onshore investments for high-net- worth individuals and institutional  investors in China, complementing our  existing asset management joint venture  with CITIC. Our first private fund has a  Chinese equities mandate and is  Eastspring total funds under management7 £bn 12.9 11.2 151 139 9.2 +1.1x 6.6 5.6 4.7 4.1 1.5 1.7 2.0 2.3 7.7 2.9 3.5 1.3 2.9 1.0 3.5 3.5 3.5 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2017 2018 www.prudential.co.uk  Annual Report 2018  Prudential plc  21 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationOur businesses Asia continued expected to launch in April 2019, with  further  investment strategies planned to  follow in due course. Customers Our strong reputation and success to date  have been built on a foundation of excellent  customer service. During 2018, we added  a further 1.4 million new life customers2,  bringing the total to over 15 million life  customers. Our strong retention ratio,  which remained in excess of 90 per cent,  and the consistently high proportion of  repeat sales, which last year contributed  over 40 per cent of APE sales, demonstrate  the regard and trust our customers have in  our business. These dynamics mean that  we have 24 million in-force policies in total,  with each of our policyholders holding 1.6  policies on average. In addition, our focus  on health and protection business is  reflected in a 7 per cent increase in  sum-at-risk per policy, which is a leading  measure of insurance coverage. Funds  managed by Eastspring grew by 6 per cent  to £151 billion at the end of 2018, with  10 per cent growth amongst third-party  retail clients.  We maintain this advantage by constantly  striving to improve the experience of our  customers, with whom we have over  two million interactions every month,  including over 300,000 calls. Our  customers typically need us most when  they want to submit a claim as this can  signify the death or illness of a family  member. Consequently, we strive to  provide a frictionless claims process at this  sensitive time. To facilitate this, our new Jet  claims tool, which is currently being used  in Hong Kong and Indonesia, can  automatically review, assess and pay  a claim on the same day. We now have  e-claims capability in six of our businesses  and have already attained submission rates  of almost 40 per cent. We also leverage  technology in our more regular dealings  with customers. For example, our new  Virtual Assistant in Hong Kong, which  builds upon the success of our askPRU  chatbot that was launched in Singapore in  2017 and reduced call centre volumes by  40 per cent, already has answers to many  frequently asked questions from agents  and policyholders.  At Eastspring we use digital tools to help  our retail clients set and achieve their  savings goals. Our partnership with  Alkanza has enabled us to build a robo- advisory platform in Taiwan that can  suggest portfolio rebalancing if  performance is off track and has the  functionality to show the impact of changes  PRUworks PRUworks is a digital ecosystem designed  to help small and medium-sized enterprises  (SMEs) grow their businesses, and attract  and retain talent. A first-of-its-kind platform  by an insurer in Singapore, PRUworks gives  business owners and their employees easy  and convenient access to insurance,  employee benefits and business solutions in  one seamless digital experience.  PRUworks is targeted specifically at SMEs,   an under-served market in need of solutions  catering to their size and budget. Wellness  solutions, a core component of PRUworks,  are offered as part of Prudential’s  collaboration with healthtech companies  and include fitness monitoring, specialist  doctor recommendations and health  screenings. Participating SMEs can also  enjoy complimentary access to the  Singapore government’s ‘SME Health+’  initiative, which includes programmes in  chronic disease management, healthy  eating, active living and mental wellbeing.  in parameters, such as retirement age  and contribution amount.  Products We offer our customers a broad range of  health, protection and savings solutions  that are tailored to local market  requirements and individual needs.  Key to our ongoing success is our focus  on upgrading our product suite to add  innovative new features. Indeed, last year  nearly half of new business profit arose  from the 160 products that were developed  in 2018. For example, in Hong Kong we  launched a new critical illness product with  extended protection for cancer, heart  attacks and strokes, three common causes  of death, and was instrumental in  generating the 17 per cent growth in Hong  Kong’s new business profit. Similarly, we  enhanced our protection product for  mothers and unborn children in Malaysia,  PRUmy child, by expanding the range of  pregnancy complications included and  extending the coverage period for  congenital illnesses. We are also actively  developing products to meet the upcoming  needs of Asia’s ageing populations and  were amongst the first group of insurers to  be granted approval to offer a tax-deferred  pension product in China. In addition, we develop products with  specialist characteristics that broaden our  offering and appeal. We have been  proponents of products that comply with  the requirements of Islamic law for many  years. Indeed, we offer such products by  default, and sales of our Syariah products  in Indonesia grew by 17 per cent in 2018  to over £50 million, equivalent to over  20 per cent of our APE in this market.  This positions us as market leaders in  Indonesia’s Syariah market, in addition to  Malaysia’s Takaful market, with market  shares of approximately 30 per cent in both  cases. We have also launched PRUvital  cover in Singapore, a first-in-the-market  protection plan for customers with four  types of common pre-existing chronic  medical condition that previously could act  as barriers in obtaining insurance coverage. Historically our products were targeted at  the mass and affluent market segments.  We are purposefully developing new  products to meet the needs of other  segments. In Singapore we recently  launched Opus, a proposition specifically  tailored for high-net-worth customers.  This brings a differentiated experience for  our customers and includes a dedicated  service team, wealth planners and external  experts covering trust and legal matters.  We also launched PRUworks, our new  insurance proposition for the corporate  segment to target small and medium  enterprises. Our PRUworks platform is an  all-inclusive platform that comes with a  digitally enabled HR solution for business  owners and their employees, which  provides access to employee benefits and  services alongside additional services  such as lifestyle programmes.  22  Prudential plc  Annual Report 2018  www.prudential.co.uk A leading pan-Asia franchise Accelerate Asia Compounding revenues and profits Prudential Corporation Asia is a business  with compounding revenues underpinned  by high quality recurring income that is  uncorrelated to investment markets. The  current scale and profitability has been  achieved by increasing our customer base  and penetration across the continent.  Growth is driven by our ability to meet  customer needs through the breadth of  markets we operate in, the scale and  innovation of our operations, the  capabilities of Eastspring Investments, our  pan-Asia asset manager, and our diverse  and talented workforce. Diversification  11 1 10 9 8 £2,164m +14% 2 7 6 5 4 3 Operating profit by region Full year 2018 % 1 Hong Kong 2 Indonesia 3 Singapore 4 Malaysia 5 Vietnam 6 China 7 Thailand 8 Taiwan 9 Philippines 10 Eastspring 11 Others 20% +33% 20% +0% 15% +22% 9%  +9% 7%  +16% 7%  +20% 5%  +5% 2%  +24% 2%  +13% 8%  +6% 5%  +3% Growth rate vs 2017 constant exchange rates  Cambodia Life insurance Market ranking3  Population  Penetration16  China17 Life insurance Market ranking3  Population  Penetration16  Average health protection   gap per household9  Eastspring Funds under management18  Hong Kong Life insurance Market ranking3  Population  Penetration16  Average health protection   gap per household9  Eastspring Funds under management18  India19 Life insurance Market ranking3  Population  Penetration16  Average health protection   gap per household9  Eastspring Funds under management18  Indonesia20 Life insurance Market ranking3  Population  Penetration16  Average health protection   gap per household9  Eastspring Funds under management18  Japan Eastspring Funds under management18  Korea Eastspring Funds under management18  Laos Life insurance Market ranking3  Population  Penetration16  1st 16m 0.1% 5th 1.4bn 2.7% US$1,724 £6.2bn 3rd 7m 14.6% US$9,156 £3.4bn 2nd 1.4bn 2.8% US$1,382 £17.8bn 1st 267m 1.9% US$1,230 £4.0bn £5.4bn £8.1bn Top 3 7m 0.0% Malaysia21 Life insurance Market ranking3  Population  Penetration16  Average health protection   gap per household9  Eastspring Funds under management18  Philippines Life insurance Market ranking3  Population  Penetration16  Average health protection   gap per household9  Singapore22 Life insurance Market ranking3  Population  Penetration16  Average health protection   gap per household9  Eastspring Funds under management18  Taiwan Life insurance Market ranking3  Population  Penetration16  Average health protection   gap per household9  Eastspring Funds under management18  Thailand Life insurance Market ranking3  Population  Penetration16  Average health protection   gap per household9  Eastspring Funds under management18   Vietnam Life insurance Market ranking3  Population  Penetration16  Average health protection   gap per household9  Eastspring Funds under management18  1st 32m 3.3% US$6,864 £8.1bn 3rd 107m 1.2% US$1,406 2nd 6m 6.6% US$13,776 £80.1bn 13th 24m 17.9% US$4,823 £4.9bn 9th 69m 3.6% US$287 £9.3bn 4th 97m 1.3% US$1,251 £2.6bn www.prudential.co.uk  Annual Report 2018  Prudential plc  23 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information              Our businesses Asia continued Distribution Our diversified mix of tied agents and bank  partners creates one of the strongest  distribution networks across the region  with non-traditional partnerships further  broadening our reach. Our experience  shows customers have an overarching  preference for face-to-face advice from  a trusted financial adviser while also  increasingly demanding the flexibility to  conduct basic research and fact-finding  themselves digitally. Thus, whilst our tied  agents and in-branch bank staff remain our  primary distribution channels, customers  are now more actively engaging with us  through our online platforms.  Prudential has over 600,000 licenced tied  agents across our 12 life markets in Asia.  This proprietary distribution channel is a  core component of our success, accounting  for 84 per cent of new business profit,  having grown by 14 per cent in 2018. The  value provided by our tied agents makes it  paramount for us to continue expanding  their reach and enhancing their  capabilities. We place great emphasis  on the professionalism and productivity  of our agency force, and facilitate this by  continually providing new and upgraded  tools. This creates a culture whereby our  agents aspire to attain membership of the  ‘Million Dollar Round Table’, an industry- recognised indicator of quality. We  currently have over 7,000 such qualifiers,  which would represent annual growth in  members of approximately 20 per cent23  and reflects our focus on the recruitment,  training and productivity of our agents,  the emphasis on which varies by market.  In our younger markets we are typically  still accelerating recruitment. For example,  we added over 1,100 new agents per  month in the Philippines on average during  2018, which was more than 40 per cent  higher than in 2017, and helped expand our  agency force to around 28,000 agents. As  markets mature the emphasis starts to shift  Notes 1  Growth rate on a constant exchange rate basis. 2  Excluding India. 3  Based on full year 2018 or the latest information available.  Sources include formal (eg competitors results release,  local regulators and insurance association) and informal  (industry exchange) market share data. Ranking based  on new business (APE sales, weighted full year premium  or full year premium depending on availability of data).  IFRS gross premiums earned for Asia segment. Includes renewal premiums from joint ventures.   See note III of the additional unaudited financial  information for reconciliation to IFRS balances. 4  5  6  Adjusted IFRS operating profit based on longer-term  investment returns. See note B1 of the IFRS financial  statements for reconciliation to IFRS profit. 7  Growth rate on an actual exchange rate basis. 8  New business profit on business sold in the year,  calculated in accordance with EEV principles. 9  Swiss Re Institute: The health protection gap in Asia,  October 2018. Average gap per household is calculated  as ‘total health protection gap divided by the estimated  number of households hospitalised under the mentioned  gap range’. Report excludes Cambodia and Laos. towards the other factors. We have  designed an entrepreneur development  programme to fast-track our successful  professional agents into leaders, which in  turn supports our activation of new  recruits. This programme has already been  launched in China, where the number of  active agents grew by 12 per cent in 2018.  We pioneered the strategy of partnering  with banks in Asia over 20 years ago and  now have one of the largest and most  successful bancassurance franchise in the  region. Our strategic bank partnerships  include multi-national banks, regional  banks and prominent domestic banks in  many key markets including China, India  and Taiwan. In total we have access to over  14,000 bank outlets. Collectively, these  partnerships contributed over 30 per cent  of our APE sales in 2018 and associated  new business profit grew by 19 per cent. We have also started collaborating  with non-traditional partners, including  DirectAsia, Hiscox’s online property  and casualty business in Singapore, and  Eureka, a data management and analytics  platform based in Indonesia. These  mutually beneficial partnerships will enable  us to reach new customers and create  unique opportunities for our existing ones. Business outlook We continue to see a strong runway for the  insurance and asset management industries  in Asia. We recently conducted a strategic  assessment, which re-affirmed the  strengths of our business, established the  potential future size of our markets and has  informed our future investment pathway.  The review demonstrated that we are well  positioned in the traditional life insurance  segment, with a market share of  approximately 25 per cent24. We forecast  that this market has the potential to  continue growing at a double-digit rate over  the coming five years, due to the underlying  structural drivers of demand in the region.  Our presence, scale and broad product  and distribution reach position us well to  participate strongly in this expected growth. We also anticipate strong growth in the  medical reimbursement segment in our  current markets, which we believe will  more than double in the next five years due  to increasing consumer demand. We have  estimated that our share of the value pool  in this segment is currently 9 per cent,  which gives us significant scope to expand.  This ambition is reflected in our strategic  priorities with recent investments, such as  Babylon, transforming our offering. Our market-leading position in retail fund  management reflects our region-wide  presence and strong operating credentials.  This positions us well for the future growth  in the market that is expected from new  wealth creation and the shift we envisage  from deposits to riskier investments. We  believe these factors make double-digit  growth viable in India, where we are market  leaders, alongside other key markets such  as China and Thailand, where we have  taken action to strengthen our position.  Nic Nicandrou Chief Executive Prudential Corporation Asia 10 Brookings Institution. Global Economy & Development  Working Paper 100. February 2017. ‘Asia’ represents  Asia Pacific. 11  United Nations, Department of Economics and Social  Affairs, Population Division (2017). World Population  Prospects: The 2017 Revision. 12  Working age population: 15 to 64 years. 13  ©Copyright 2018 Strategic Insight, an Asset International  Company and when referenced or sourced Morningstar Inc.,  Standard & Poor’s Inc., and Lipper Inc. All rights reserved.  The information, data, analyses and opinions contained  herein (a) include confidential and proprietary information  of the aforementioned companies, (b) may not be copied  or redistributed for any purpose, (c) are provided solely  for information purposes, and (d) are not warranted or  represented to be correct, complete, accurate, or timely. 14 Weighted premium income comprises gross earned  premiums at 100 per cent of renewal premiums,  100 per cent of first year premiums and 10 per cent  of single premiums. 15  Comparatives have been stated on a constant exchange rate  basis. Historic results have been restated to exclude sales  from the Korea and Japan life businesses, which have been  disposed of. 2014 excludes intra-group reinsurance  contracts between the UK and Asia with-profits businesses. 16 Market penetration: Swiss Re (Sigma) – based on insurance  premiums as a percentage of GDP in 2017 (estimated). 17  Total joint venture / foreign players only. 18 FUM reported based on the country where the funds  are managed. 19 IFRS gross premiums earned for Asia segment. 20 Excludes Jiwasraya. 21 Includes Takaful sales and excludes Group business. 22 Includes onshore only, excluding Eldershield and DPS. 23 Based on 100 per cent conversion of qualifiers into members. 24 Proprietary research/Bain Analysis (2018) covering the  following markets: Hong Kong; Singapore; Indonesia;  Malaysia; China; and India, using sales data provided by  insurance regulators, insurance associations and industry  expert surveys in these markets. 24  Prudential plc  Annual Report 2018  www.prudential.co.uk Driving our business Creating value and benefiting our stakeholders Customers In Asia, we focus our efforts on helping new and existing  customers build better futures for themselves and their  families, by helping to fill the savings and protection gap  that exists in many markets in the region. 15 million life customers Products We listen to our customers to help us understand  their changing needs and tailor our design of product  solutions and services.  94% of APE sales in regular premium 70% of all new business submitted through e-point-of-sale technology Distribution We are well-positioned in terms of the scale and  diversity of our distribution to reach and serve  our customers’ needs. At the core of our distribution  model is face-to-face customer interaction that delivers  high-quality, needs-based advice. Investment for growth Building on our strong track record, we are building  for future growth by investing in new opportunities  and capabilities. +600,000 agents Access to over 14,000 bank outlets Now in 87 cities in China 9 new bank partners across 6 markets Eastspring Investments’ total funds under management £151 billion www.prudential.co.uk  Annual Report 2018  Prudential plc  25 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationUnited States 2018 performance highlights — New distribution relationship with State Farm — New collaboration to offer advisory annuities on the Envestnet® Insurance Exchange — Awarded ‘Contact Center World Class CX Certification’ and ‘Highest Customer Service for the Financial Industry’ awards by The Service Quality Measurement Group, Inc. 26  Prudential plc  Annual Report 2018  www.prudential.co.uk Our businesses United States Providing an ageing American population with financial strategies for stable retirements. The US is the world’s largest retirement  savings market with approximately  40 million Americans reaching retirement  age over the next decade. This transition  will trigger the need for an unprecedented  shift of trillions of dollars from savings  accumulation to retirement income  generation. Customers and products Through its distribution partners, Jackson  provides products that offer Americans the  retirement strategies they need, including  variable, fixed and fixed index annuities.  Each of these products offer a unique  range of features tailored to meet the  individual needs of the retiree: However, these Americans face challenges  in planning for life after work. For those  nearing the end of their working careers,  a financially secure retirement is at risk, due  to insufficient accumulation of savings and  the current combination of low yields and  market volatility. Employer-based pensions  are disappearing, and government plans  are underfunded. Social security was  never intended to be a primary retirement  solution and today its long-term funding  status is in question. Additionally, the life  expectancy of an average retiree has  significantly increased, lengthening the  number of years for which retirement  funding is needed. To overcome these challenges, Americans  need and demand retirement strategies  that offer them the opportunity to grow  and protect the value of their existing  assets, as well as the ability to provide  guaranteed income that will last  throughout their extended lifetimes.  In response to this demand and the  ongoing shift to fee-based solutions,  Jackson has positioned itself with product  innovation and distribution strategies to  further enhance our market-leading VA  position in the brokerage market and grow  in the advisory retirement solutions market. Variable annuity A Jackson variable  annuity, with investment freedom,  represents an attractive option for retirees,  providing both access to equity market  appreciation and guaranteed lifetime  income as an add on benefit. Fixed index annuity A Jackson fixed  index annuity is a guaranteed product with  limited market exposure but no direct  equity ownership. It is designed to build  wealth through a combination of a base  crediting rate that is generally lower than  a traditional fixed annuity crediting rate,  but with the potential for additional  upside, based upon the performance  of the linked index. Fixed annuity A Jackson fixed annuity is  a guaranteed product designed to build  wealth without market exposure, through  a crediting rate that is likely to be superior  to interest rates offered from banks or  money market funds. These products also offer tax deferral,  allowing interest and earnings to grow  tax-free until withdrawals are made. Jackson has a proven track record in this  market with its market-leading flagship  product1, Perspective II. Jackson’s success  has been built on its quick-to-market  product innovation, as demonstrated by  the development and launch of Elite  Access, our investment-only variable  annuity. Further demonstrating Jackson’s  flexibility and manufacturing capabilities,  and in response to the trend in financial  services toward fee-based solutions,  Jackson has launched Perspective  Advisory II and Elite Access Advisory II  to serve advisers and distributors with  a preference for advisory products. In March 2018, Jackson launched  MarketProtector and MarketProtector  Advisory, two new fixed annuities with  index-linked interest. These products  provide consumers with the sought-after  combination of tax-deferred investment  growth, protection from market risk and  the flexibility to adapt to changing needs in  retirement. Both products offer an add-on  living benefit that allows customers to  safeguard their financial futures with  income for life. Also, in 2018, Jackson took a lead role in  bringing together 24 of America’s financial  services organisations to launch the  Alliance for Lifetime Income (Alliance).  The Alliance was launched to educate  Americans on the risk of outliving their  income, so they can enjoy their years in  retirement. The Alliance’s nationwide,  multi-year, integrated educational  campaign is designed to raise awareness  and motivate consumers and financial  advisers to discuss the need for protected  lifetime income in retirement, which can be  achieved with the use of annuity products  such as those provided by Jackson. Distribution Jackson distributes products in all 50 states  of the US and in the District of Columbia.  Operations in the state of New York are  conducted through a New York subsidiary.  Jackson markets its retail products primarily  through advice-based distribution  channels, including independent agents,  independent broker-dealer firms, regional  broker-dealers, wirehouses and banks. For  variable annuity sales, Jackson is the leader  in the independent broker-dealer, bank  and wirehouse channels2 and fourth in  regional firms2. www.prudential.co.uk  Annual Report 2018  Prudential plc  27 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationOur businesses United States continued Jackson’s distribution strength also sets  us apart from our competitors. Our  wholesaling force is the largest3 in  the variable annuity industry and is  instrumental in supporting the  independent advisers who help the  growing pool of American retirees develop  effective retirement strategies. Our  wholesalers provide extensive training to  thousands of advisers about the range of  products and the investment strategies  that are available to support their clients.  Based on the latest available data, Jackson  is the most productive variable annuity  wholesale distribution force in the US3. In October 2018, Jackson announced a  new distribution relationship with State  Farm®. In the second half of 2019,  authorised State Farm agents will begin  offering a select group of Jackson’s variable  annuity and fixed index annuity products.  While Jackson currently maintains one of  the largest sales teams in the industry, this  distribution relationship will add significant  distribution access through State Farm’s  growing network of qualified producers. In February 2019, Jackson partnered with  DPL Financial Partners (DPL) to provide  our protected lifetime income solutions to  independent registered investment  advisors (RIAs). The collaboration expands  Jackson’s distribution footprint and  provides Jackson with access to new  opportunities in the independent  RIA channel. Regulatory landscape The industry has continued to manage  through an ever-changing regulatory  landscape. In 2016, the US Department  of Labor (DoL) released a final version of  its Fiduciary Duty Rule (Rules), which  sought to eliminate conflicts of interest in  investment advice, in order to protect and  encourage savings and investment for  working Americans. These Rules were  rescinded in 2018. However, other  alternative proposals, such as the US  Securities and Exchange Commission’s  (SEC) best interest standard, remain  pending.  As a result of an improved regulatory  outlook, rising interest rates and more  aggressive product feature changes  (ie withdrawal percentages) implemented  by competitors, the annuity industry saw  increased sales in 2018 (albeit still well  below levels prior to the DoL Rules  proposal). Sales in the variable annuity  industry as of the third quarter of 2018 at  US$75.4 billion4 were up 4 per cent  compared with the same period last year. Regardless of the outcome of the SEC best  interest standard, the regulatory disruption  caused by the now rescinded DoL Rules  has challenged the industry to review the  ways in which investment advice is  provided to American investors.  Manufacturers will need to have the ability  to provide product and system adaptations  in order to support the success of various  distribution partners in their delivery of  invaluable retirement strategies that  investors need. Because of its strong  distribution, leadership in the annuities  market, best-in-class service and a  low-cost efficient operation, we believe  that Jackson is well positioned to take  advantage of this opportunity. Furthermore, in late 2018, the US National  Association of Insurance Commissioners  (NAIC) concluded an industry consultation  with the aim of reducing the non-economic  volatility in the variable annuity statutory  balance sheet and enhancing risk  management. The NAIC is targeting a  January 2020 effective date for the new  framework in order to allow adequate time  for the drafting and implementation of the  revised regulations and instructions with  a potential three-year phase-in. The NAIC  also has an ongoing review of the C-1 bond  factors in the required capital calculation,  on which further information is expected to  be provided in due course. Despite these  regulatory challenges, we believe that  Jackson is well positioned to manage the  impact of these regulatory changes. Retirement wave Population by age5 Under-saved Median net worth6 (US$000) Increased longevity Life expectancy at 657 4.4m 4.5m 4.0m 187.3 19.4 124.2 14.3 Age 65 in 2019 Age 60 in 2019 Age 55 in 2019 45-54 55-64 1960 2016 28  Prudential plc  Annual Report 2018  www.prudential.co.uk Talking to Americans about bridging the retirement income gap Last year, Jackson reintroduced the idea of  ‘protected lifetime income’ into American  retirement planning conversations by  publishing ‘The Return of Lifetime Income’  in The Wall Street Journal, reaching millions  of consumers. Recognising the need for a  unified industry voice around this critical  issue, Jackson also co-founded The Alliance  for Lifetime Income, an innovative industry  coalition to raise awareness among  Americans about the financial risks and  income gaps they may face in retirement  and the importance of protected lifetime  income solutions in helping bridge those  potential gaps.  As Alliance co-chair, Jackson leads the  charge to bring together 23 peer companies,  non-profit groups and leading financial  experts to create awareness about the role  annuities can play in truly comprehensive  financial plans.  The Alliance shares its mission through  a breakthrough national educational  campaign, including online and offline media  engagement and advertising, digital and  social media communication, content  marketing, live events, virtual reality  experiences, new financial planning tools,  and much more.  Investment for growth With trillions of dollars of adviser- distributed assets across distribution  platforms that have not historically been  a focus, such as the dually-registered  investment adviser channel, we believe  that a significant opportunity exists to  reach even more American retirees and  serve their needs with annuity products  going forward. The industry will need to  remain flexible and cost-effective in  making changes to product systems and  processes. We continue to seek to  understand and make the necessary  adjustments to support the needs and  demands of American retirees into the  future. In September 2018, Jackson announced  a technology integration collaboration  with Envestnet® allowing Jackson to offer  its complete product suite of advisory  annuities on the Envestnet Insurance  Exchange. The new collaboration brings  together a leading provider of annuities  in the US, with the leading provider of  intelligent systems for wealth management  and financial wellness. Jackson is working  with Envestnet to make annuities easier  to work with inside of a client’s portfolio.  Advisers will be able to create more value  for their clients by holistically considering  longevity risk, sequence of returns risk,  market risk and mortality risk within the  Envestnet wealth management platform. The acquisition of John Hancock’s group  payout annuity business in late 2018  represents a reaffirmation of Jackson’s  growth bolt-on strategy and continuing  commitment to deploy capital at attractive  return levels. This transaction further  diversifies Jackson’s risk portfolio and  revenue sources in relation to both general  and separate account businesses. With the ever-changing regulatory  environment described earlier, Jackson has  made and continues to consider changes to  its product offerings, entered into new  selling agreements with advisory providers,  and is working with its distributors to  support implementation of the anticipated  SEC best interest standard. www.prudential.co.uk  Annual Report 2018  Prudential plc  29 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationOur businesses United States continued Jackson’s competitive strengths are even  more critical during periods of disruption.  Our best-in-class distribution team, our  agility and success in launching well  designed products, the continued success  of our risk management and hedge  programmes through many economic  cycles, and our effective technology  platforms and award-winning customer  service will provide Americans with the  retirement strategies they so desperately  need. Jackson’s discipline will enable us to  be positioned to capture additional growth  during times of transition into the future. Michael Falcon Chairman and Chief Executive Jackson Holdings LLC Notes 1  ©2019 Morningstar, Inc. All Rights Reserved. The  information contained herein: (1) is proprietary to  Morningstar and/or its content providers; (2) is not  warranted to be accurate, complete, or timely. Neither  Morningstar nor its content providers are responsible for  any damages or losses arising from any use of this  information. Past performance is no guarantee of future  results. Morningstar www.AnnuityIntel.com Total Sales  by Contract 3Q YTD 2018. Jackson’s Perspective II for  base states ranks #1 out of 973 VA contracts with reported  sales to Morningstar’s quarterly sales survey as of  3Q YTD 2018. 2  ©2019 Morningstar, Inc. All Rights Reserved. The  information contained herein: (1) is proprietary to  Morningstar and/or its content providers; (2) is not  warranted to be accurate, complete, or timely. Neither  Morningstar nor its content providers are responsible for  any damages or losses arising from any use of this  information. Past performance is no guarantee of future  results. Morningstar www.AnnuityIntel.com Total sales by  company and channel 3Q YTD 2018. Jackson ranks #1 out  of 25 companies in the Independent NASD channel, #1 out  of 20 companies in the Bank channel, #1 out of 16  companies in the Wirehouse channel, and #4 out of 19  companies in the Regional Firms channel.  3  Independent research and Market Metrics, a Strategic  Insight Business. US Advisor Metrics 2018, as of  30 September 2018. 4  LIMRA/Secure Retirement Institute, US Individual Annuity  Participants Report 3Q YTD 2018. 5  US Census Bureau Population division 2014 estimate  of population. 6  2016 Federal Reserve Board’s Triennial Survey of  Consumer Finances. 7  US Department of Health and Human Services,  ‘Health, United States, 2017. 8  New advisers defined as producers who have not sold  Jackson product since 2013. 30  Prudential plc  Annual Report 2018  www.prudential.co.uk Driving our business Creating value and benefiting our stakeholders Customers Many retirees or soon-to-be retirees face a reality of  under-saving, having no guaranteed income source and  the prospect of living longer than any prior generation.  Jackson’s focus is to provide solutions to help address  these concerns for the millions of Americans currently  transitioning to and through retirement. Products Jackson’s products provide needed access to equity  market growth, protection of principal, and a way of  converting retirees’ savings into retirement income with  a degree of certainty. With a long history of disciplined  product design and prudent risk management,  Jackson has earned and continues to earn trust from  its key stakeholders. Distribution Jackson’s distribution teams set us apart from our  competitors. Jackson’s variable annuity wholesaling  force is the largest and most productive in the industry,  supporting thousands of advisers across multiple  channels and distribution outlets. Investment for growth Jackson continues to invest in technology and  innovative products to efficiently and effectively adapt  to what our customers and regulatory environment  require. Jackson has recently launched an advisory  version of our flagship product Perspective II, our  innovative Elite Access product and our fixed index  MarketProtector product to allow for penetration  into untapped distribution. Jackson also announced  a technology integration collaboration with Envestnet®  allowing Jackson to offer its complete product suite of  advisory annuities on the Envestnet Insurance Exchange. Average of 10,000 Americans retire per day 5 Assisting 4 million customers with their financial needs Leading individual annuity seller in the US4 Perspective II is the #1 selling variable annuity contract1 Largest and most productive VA wholesale distribution force in the US3 New marketing alliance with State Farm adding significant distribution access through its growing network of qualified producers Technology integration collaboration with Envestnet® Approximately 32% of Jackson’s 2018 advisory variable annuity sales from new advisers8 www.prudential.co.uk  Annual Report 2018  Prudential plc  31 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationM&GPrudential 2018 performance highlights — Total M&GPrudential operating profit up 19 per cent to £1.6 billion, including the effect of updated longevity assumptions — Total assets under management of £321 billion1 including a rise in PruFund assets to £43 billion from £36 billion last year — Major transformation programme already showing improvements in digital service for customers — Luxembourg SICAV fund range launched with £21 billion assets under management as an investment in international growth and to minimise disruption of Brexit for customers — Demerger preparation progressing at pace with several major milestones reached 32  Prudential plc  Annual Report 2018  www.prudential.co.uk Our businesses M&GPrudential Building a simple and efficient savings and investments business. M&GPrudential is the UK and Europe  savings and investments business of  Prudential plc. It was formed in 2017  through the merger of Prudential’s UK  and Europe insurance operations with  M&G Investments, Prudential’s  international asset manager. Our business manages total assets of  £321 billion1 and serves more than  six million customers worldwide.  M&GPrudential offers savings and  investment products for individuals who  want to build and protect their life savings.  We provide innovative asset management  and customer solutions, supported by  strategic asset allocation, an international  distribution network and two strong brands. In March 2018, the Board of Prudential plc  announced its intention to demerge  M&GPrudential. The Prudential Board  believes the demerger will further  strengthen two already strong businesses.  For M&GPrudential, the demerger will  enable our leadership team to focus solely  on what is important to our customers, give  us direct control over our own capital and  enable us to pursue growth opportunities  without competing for resources with other  Prudential plc businesses. M&GPrudential  is expected to have a premium listing on  the London Stock Exchange.  We see a huge opportunity in the growing  savings gap across Europe. As support  from the state diminishes and employers  gradually retreat from guaranteed  retirement provisions, more and more  people need to make their own  preparations for retirement and other life  goals. At the same time, many people with  sizeable asset pools, who want to grow or  protect their value, seem to be keeping  their money in cash despite the negative  real return. Across the EU there is an  estimated ¤10 trillion2 of cash sitting,  largely idle, in bank deposits at very low  interest rates. We believe M&GPrudential is well placed  to help our customers build and protect  their savings because of the mix of our  businesses, capabilities and people. We  combine the best of fund management  with compelling customer propositions  in a highly collaborative culture. Our  competitive advantages arise from the  strength and depth of this business mix  built over many years.  We have a full set of diversified investment  capabilities with expertise spanning a  range of fixed income, equity, multi-asset,  real estate and private asset classes. We  are one of the largest multi-asset managers  in Europe through the £131 billion  Prudential With-Profits Fund and our  range of branded M&G funds, and manage  £59 billion of private assets, including an  international real estate portfolio. We are a  UK market leader in savings solutions with  our PruFund proposition, a modern way of  with-profits investing. We also have one of  the fastest growing advised platforms3 in  the UK, reaching £13.3 billion in assets  under administration in the 24-month  period since launch. We have a growing  international distribution network with  multi-channel breadth and depth, and  two of the strongest brands in the market. Building on these competitive advantages,  M&GPrudential’s priorities in 2019 will be:  — to continue to serve our customers well,  by improving outcomes and service  levels, and widening product choice;  — to advance our merger and  transformation programme, to  modernise the business so that we  become a simpler, lower-cost, digital  organisation; and  — to prepare M&GPrudential for  demerger and its future as an  independent company with its  own listing on the stock market. Understanding our markets M&GPrudential serves the world’s largest  savings and investments markets, with a  focus on UK and Europe. Across the  region, people increasingly need help to  meet their long-term financial goals as  responsibility for retirement savings passes  from state and employer to the individual.  Customers in our markets demand easy  access to savings and investment solutions,  as well as guidance and advice from trusted  providers. In addition, persistently low  rates of return on bank cash deposits are  fuelling demand for effective solutions,  whether clients are saving for retirement,  building a lump sum or protecting their  wealth from inflation.  In the institutional market, clients are  increasingly seeking bespoke solutions  from asset managers with diversified  investment capabilities and global reach.  The combination of M&GPrudential’s  expertise in private assets, which are much  in demand in this sector, and our growing  international network of offices means we  are well placed to serve these clients. Customers We serve a wide range of customers:  individuals saving for retirement and other  life goals; retirees who want to draw down  on their accumulated savings; professional  intermediaries who manage the savings of  their own customers; pension funds; and  other institutional clients with future,  long-term financial commitments. What all our customers have in common  is the desire for professional help to build  and protect their savings with confidence.  Our approach is to offer a broad range  of products and services, in a variety of  formats, through multiple distribution  channels – all backed by the same in-house  investment expertise and capability. www.prudential.co.uk  Annual Report 2018  Prudential plc  33 M&GPrudential 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationOur businesses M&GPrudential continued Our customers fall into five broad categories:  — UK retail advised customers who are  saving for retirement or who want to  draw down on their accumulated  savings. They typically invest in our  market-leading PruFund, which offers  smoothed, long-term returns adjusted  for different risk tolerances;  — UK retail advised and direct customers  who invest for the long term through  our range of M&G-branded mutual  funds. This group includes about  160,000 customers who invest directly  with our fund management business;  — Customers of our traditional insurance  business in the UK. Numbering  six million, these customers typically  hold a Prudential annuity, which pays  an income for life, or an insurance- wrapped savings bond;  — Wholesale clients in Europe and Asia.  These include retail banks, private  banks, wealth managers, independent  advisers and fund platforms. We  manage £38 billion on behalf of these  clients’ own customers; and  — Pension funds and other institutional  clients, who invest on behalf of their  scheme members. We have nearly 900  such relationships, including 70 per cent  of the UK’s largest pension schemes4.  PruFund investment performance7 100% 75% 50% 25% 0% -25% In 2019, we will continue to improve service  levels and launch new offerings. In the UK  retail market, we will broaden the choice of  tax wrappers and products on our own  adviser platform. In November, we made  M&G’s range of mutual funds available for  the first time on the Prudential adviser  platform and in January, we launched  PruFolio, a new range of passive, active and  smoothed return funds. Our investment solutions The core engine of our business is a  long-standing collaboration between  our fund managers and the strategic asset  allocators who oversee the investment  of the Prudential life funds. This symbiotic  relationship enables us to diversify our  investment capabilities and to innovate  by developing high-quality products for  all customers. For customers of our traditional insurance  business, our modernisation programme  is already improving service levels.  Deployment of new digital technology  has reduced markedly the time it takes to  process a redemption from a Prudential  savings bond. Customers can now register  for our MyPru online service in minutes. During 2018, we transferred £21 billion of  our key European fund offerings into new  Luxembourg-based SICAVs, with the  process expected to be completed as  planned in the first quarter of 2019. This  positions us well to minimise any potential  disruption for our European clients  stemming from the UK’s withdrawal from  the European Union, while also creating  a more flexible and robust platform for  international growth. Our investment capabilities span the  traditional public markets, from cash  through fixed income and on to international  equities. We also have a large range of  private asset capabilities with £59 billion of  assets under management, covering real  estate, private debt, corporate loans and  infrastructure investments such as  broadband and solar energy. This breadth of our investment capability  underpins many of our customer offerings.  It reinforces the reliability of the returns from  our £131 billion With-Profits Fund, which is  one of Europe’s largest multi-asset portfolios  for retail savers5. The With-Profits Fund has  produced a cumulative gross return of  129.5 per cent over 10 years6 before tax and  charges compared with a 121.4 per cent  return from the FTSE 100 Index over the  same period, not allowing for any  management fees. A key component of this  performance is PruFund. Launched over  10 years ago, PruFund is a transparent and  modern way of with-profits investing in the  UK, which has since become the fastest- growing savings and investment proposition  across the Group.  +88% +45% Mutual fund investment performance, net of fees, weighted by: assets under management8 % Since fund manager tenure – Dec 2018 (Average = 5.7 years) Three years – Dec 2018 55 19 8 18 One year – Dec 2018 9 35 25 31 73 13 9 5 Five years – Dec 2018 50 5 25 20 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018   PruFund Growth    ABI sector comparator   First quartile   Second quartile   Third quartile   Fourth quartile 34  Prudential plc  Annual Report 2018  www.prudential.co.uk Improving the service for our M&GPrudential customers When Prudential UK customers want to  withdraw their funds from a bond they expect  the speed and simplicity they’d receive from  online shopping. So the challenge was to  simplify a complex, manual process and  enable customers to get access to their  money more quickly. over three days. And the online journey is now  much easier to use than the old one. In fact,  33 per cent of customers making a withdrawal  have already adopted it after just four months.  But even vastly improved journeys are only as  good as customers’ experience of them and,  so far, they like it and tell us it’s easy to use. Our savings and investments business took  the approach of transforming the whole  customer journey – the customer experience  from start to finish – rather than looking at  each stage of the process individually,  as they had done previously. As a result, they’ve made significant  improvements. The time customers have had  to wait for us to send them their funds has  been cut from more than two weeks to just  Following further cross-team collaboration,  the business has just launched a version for  independent financial advisers (IFAs) too and  the initial response has been great. One IFA  told us that being able to gain access to this  data ‘at the touch of a button is market-leading  and saves two weeks when compared to  some competitors’ manual processes.’ PruFund offers individuals different rates  of smoothed return aligned with their  tolerance for risk. In 2019, we aim to  enhance advisers’ access to PruFund by  significantly upgrading our digital services  across a range of tax wrappers. We are also  exploring with European distributors, how  we might make the benefits of PruFund  available to savers in their markets. Today,  assets under management in PruFund top  £43 billion after attracting £8.5 billion of  net inflows during 2018. The With-Profits Fund has acted as an  incubator for other products too. Among  these are a range of investment strategies  based on private asset investments – such  as real estate, infrastructure assets and  private debt – and marketed to clients  seeking this type of exposure.  We are seeing strong demand from  pension funds for our private asset  products because they are seeking higher  yields to manage long-term liabilities.  These types of investment strategy remain  comparatively resilient to fee pressure  because they are not easy for passive  investment managers to replicate as they  involve securing real and private assets. During 2018, we continued to expand our  range of mutual funds for retail investors.  These included the innovative M&G  Positive Impact Fund, which widens access  to impact investing for retail customers  who want to invest in companies that aim  to have a positive impact on society, and  the M&G Sustainable Allocation Fund,  a multi-asset fund incorporating  environmental, social and governance  factors. We also launched an investment  trust, M&G Credit Income Investment  Trust, which for the first time allows UK  retail investors to put their money into a  combined portfolio of public and private  debt. Responding to the growing institutional  client demand for social and environmental  investment strategies, we also launched  the M&G Impact Financing Fund, which  was awarded Best New Entrant (Fund)  at the Sustainable and ESG Investment  Awards 2018. Total assets under  management at 31 December 2018 were  £321 billion1 (31 December 2017:  £351 billion), reflecting inflows to PruFund  products, multi-asset wholesale offerings  and other institutional business, more than  offset by the expected redemption of a  single low-margin institutional mandate  and outflows from bond and equity funds  in volatile financial markets. Distribution At M&GPrudential, we have two  outstanding complementary brands, both  of which share a common philosophy of  aiming to deliver excellent long-term  customer outcomes. Currently, we choose to serve our  customers’ needs through our many  business-to-business relationships.  These relationships include thousands  of independent financial advisers, most  of the high-street banks, wealth managers,  institutional investment managers and  pension funds. Two years ago, we  established an adviser platform in the  UK to give the market better access to  PruFund. Since then, we have diversified  the range of products on the platform to  include M&G mutual funds. In 2018, it was  among the fastest growing platforms in the  UK, reaching £13.3 billion of assets under  administration. Outside the UK, we distribute our  investment products with the support of  our financial advisers, independent asset  managers, insurers and some of the world’s  largest banks. From a standing start just  under two decades ago, we have built an  international distribution network to  distribute M&G products and support  clients in 29 markets, with offices most  recently opened in Australia and the  United States. Our new Luxembourg  investment platform, as well as readying  our business for Brexit, enables us to  distribute our mutual funds more efficiently  in Europe and beyond by offering our  investment strategies in the SICAV format  favoured by many of our clients. www.prudential.co.uk  Annual Report 2018  Prudential plc  35 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationOur businesses M&GPrudential continued In September, we announced the  appointment of an M&GPrudential Chair,  Mike Evans. During the first half of 2019,  Mike and I will lead the recruitment of  the board for the new listed company,  including the appointment of independent  non-executive directors including the  heads of the key committees. John Foley Chief Executive M&GPrudential Update on business transformation and demerger Our business modernisation programme is  well advanced and already showing service  benefits for customers. In January 2018,  we announced a new partnership with  Tata Consultancy Services to transfer,  consolidate and upgrade the customer  administration systems for our traditional  insurance business. This involved the  transfer of 2,500 people, including 650  Prudential colleagues. Each day, we move closer to our model of  a simpler, lower-cost, digital organisation.  The impact on customer outcomes is  already evident. Examples include:  a new digital service for investment  bond customers that has reduced  cash withdrawal waiting times by almost  80 per cent; changes to our bereavements  processes, which are saving our customers  200,000 days of their time each year; and  delivery of simplified annual benefit  statements for more than one million  Prudential customers. M&GPrudential  remains on track to deliver the announced  annual shareholder cost savings of circa  £145 million by 2022 for a shareholder  investment of circa £250 million. The build of our corporate infrastructure  is well advanced. The M&GPrudential  leadership team is in place, a new  governance model has been implemented  and we have built a set of unified corporate  support services.  Notes 1  Represents M&GPrudential asset management external  funds under management and internal funds included  on the M&GPrudential long-term insurance business  balance sheet. 2  Household deposit data, Eurostat 2017. 3  UK Advised Platform Market data, Platforum, Q3 2018. 4  Based on the UK’s Top 50 Pension Schemes by size,  S&P Money Market Directory, June 2018. 5  M&GPrudential analysis comparing our largest with-profits  fund with other European mixed asset funds with data from  Financial Express. 6  Performance data for Prudential with-profits fund excludes  hypothecated asset pools of Optimum Bonus fund and  Risk-Managed PruFunds. Returns are shown before  charges. 7  ABI Mixed Investment 20 per cent – 60 per cent Shares  (performance is net of charge). PruFund returns are also net  of charge (0.65 per cent). Growth rate calculated across the  period August 2006 to December 2018. 8  Quartile ranking based on ranking of the funds  representative share class, net of fees, within their  respective Investment Association (IA) or Morningstar  sectors. Closed funds excluded. M&G total wholesale AUM  was £69.5 billion as at 31 December 2018, representing  22 per cent of the total M&GPrudential AUM. One year  figures represent £67.8 billion AUM, three year figures  represent £67.5 billion AUM, five year figures represent  £49.6 billion AUM, fund manager tenure figures represent  £67.8 billion AUM. Performance figures in GBP, bid to bid,  net income reinvested. Average fund manager tenure  December 2017 = 5.7 years. Source: M&GPrudential,  December 2018. IA and Morningstar Inc. combined UK  and Pan-European peer groups as at end December 2018. 36  Prudential plc  Annual Report 2018  www.prudential.co.uk Driving our business Creating value and benefiting our stakeholders Customers Meeting the growing and fast-evolving saving and  investment needs of customers across retail,  institutional and direct channels. +6 million customers £321 billion total assets under management1 across a broad range of strategies and asset classes Products Market-leading propositions, including PruFund and  the M&G Optimal Income Fund, available in a number  of saving and investment wrappers; and a range of  strategies to help institutional customers meet their  long-term commitments. £43 billion PruFund assets under management Launch of new M&G Impact Financing Fund Distribution Multi-channel distribution, based on strong  relationships with institutional investors, advisers and  intermediaries, and direct-to-customer franchises,  including Prudential Financial Planning. Extensive distribution relationships across financial advisers, high-street banks, wealth managers, institutional investment managers and pension funds Investment for growth Investing in our infrastructure to improve  customer service and business efficiency and  drive long-term growth. New offices opened in Australia and US Luxembourg SICAV fund platform for international growth Transformation programme improving customer service levels On track to deliver the announced annual shareholder cost savings of circa £145 million by 2022 www.prudential.co.uk  Annual Report 2018  Prudential plc  37 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationChief Financial Officer’s report on the 2018 financial performance Positive financial performance demonstrating our focus on implementing our strategy I am pleased to report that Prudential’s financial performance in 2018 reflects our strategic focus on driving growth in high-quality, recurring health and protection and fee business across our geographies, products and distribution channels. I am encouraged that our financial  performance has been accomplished at  the same time as the Group has made good  progress in the complex preparations for  the intended demerger of M&GPrudential  from Prudential plc, which we announced  in March 2018. We have achieved a  number of important milestones, including  the reinsurance of £12 billion of UK annuity  policies to Rothesay Life, the transfer of the  Hong Kong insurance subsidiaries to  Prudential Corporation Asia, the issuance  of £1.6 billion of substitutable debt as part  of the necessary rebalancing of capital  across the two businesses, the  establishment of a new holding company  for M&GPrudential and the transfer of UK  operating subsidiaries to that company. Our financial performance was led by our  Asia business which delivered double digit  growth in new business profit (up  14 per cent1), adjusted IFRS operating profit  based on longer-term investment returns  (‘operating profit’) (up 14 per cent1) and  underlying free surplus generation2  (up 14 per cent1). This performance is both  broad-based, with 10 markets achieving  double-digit growth1 in new business profit,  and high-quality, with health and  protection new business profit growing by  15 per cent1. Our Asia asset manager,  Eastspring, has grown operating profit by  6 per cent amidst a challenging external  environment. Our broad-based portfolio  of life insurance and asset management  businesses, high-quality products with  distinctive value-added services and  multi-channel strategy ensure that we  continue to benefit from the growing  customer demand in Asia for health,  protection and savings solutions that  we provide. In the US, we saw growth in fee income  driven by higher average account balances  offset by an increase in market-related  deferred acquisition costs (DAC)  amortisation and an expected reduction in  spread-based revenues, leading to a fall in  operating profit of 11 per cent. Jackson’s  hedge programme performed as expected  as equity markets weakened towards the  end of 2018 and contributed to an  increased risk-based capital ratio of  458 per cent, up from 409 per cent at  year-end 2017. M&GPrudential delivered operating profit  of £1,634 million, up 19 per cent (2017:  £1,378 million). This included £519 million  (2017: £597 million) from our core3  with-profits and annuity business, with the  with-profits contribution up 11 per cent to  £320 million, offset by lower annuities  earnings following the reinsurance of  £12 billion4 of liabilities in March 2018.  Other operating profits included the  benefit of updated longevity assumptions  and an insurance recovery on the costs of  reviewing internally vesting annuity sales.  M&GPrudential remains on track to deliver  the announced annual shareholder cost  savings of circa £145 million by 2022 for  a shareholder investment of circa  £250 million. Sterling weakened over the course of 2018,  compared with most of the currencies in  our major international markets. However,  average exchange rates remained above  those in 2017, leading to a negative effect  on the translation of the results from  non-sterling operations. To aid comparison  of underlying progress, we continue to  express and comment on the performance  trends in our Asia and US operations on  a constant exchange rate basis.  The performance of many equity markets  was subdued in 2018, and was characterised  by higher levels of volatility. The S&P 500  closed the year 6 per cent lower than 2017,  the FTSE 100 index was down 12 per cent  and the MSCI Asia excluding Japan index  down 16 per cent. However, average  balances, which have the most material  impact on our fee-based earnings during  the year, were mostly higher, reflecting the  concentration of equity market weakness  in the fourth quarter. Long-term yields  increased favourably in the US and our  larger Asia markets, but were only slightly  higher in the UK.  The key financial highlights in 2018 were  as follows:  — New business profit was 11 per cent  higher at £3,877 million (7 per cent on  an actual exchange rate basis), while  APE sales were up 1 per cent (down  2 per cent on an actual exchange rate  basis). In Asia, new business profit  increased 14 per cent with improved  new business margins primarily  reflecting product mix. Jackson’s new  business profit increased by 5 per cent,  primarily reflecting the favourable  effect of higher US interest rates. UK  and Europe life new business profit  grew by 3 per cent, driven by a  2 per cent increase in APE sales,  supported by continued demand for  products offering access to our PruFund  investment proposition.   — Asset management net outflows  of £11.5 billion reflected external net  outflows of £9.9 billion (2017: net inflows  of £17.3 billion) within M&GPrudential  asset management, the majority of  which related to the expected  redemption of a single, low margin  £6.5 billion institutional mandate, with  the remainder reflecting the challenging  market environment for equity and fixed  income business. Eastspring saw  external net outflows, excluding money  market funds, of £1.6 billion (2017: net  inflows of £3.1 billion on an actual  exchange rate basis), also as a result of  market conditions.  — Operating profit was 6 per cent higher  at £4,827 million (3 per cent higher on an  actual exchange rate basis). Continued  business momentum helped grow  Asia’s operating profit by 14 per cent to  £2,164 million and M&GPrudential  operating profit was 19 per cent higher,  reflecting a number of beneficial  impacts, which are not expected to recur  at the same level. In the US, operating  profit decreased by 11 per cent, as a  result of higher market-related DAC  amortisation charges.   — Total IFRS post-tax profit was up  30 per cent at £3,013 million  (26 per cent on an actual exchange rate  basis) after a £508 million pre-tax loss  following the reinsurance of £12 billion4  of UK annuities to Rothesay Life. This  increase was driven by Jackson, whose  IFRS profit after tax in 2018 was  £1,484 million, up from £245 million  (£254 million on an actual exchange  rate basis) reflecting higher interest  rates and gains from Jackson’s hedging  instruments as equity markets fell  towards the end of 2018. Group IFRS shareholders’ equity was 7 per cent  higher at £17.2 billion. 38  Prudential plc  Annual Report 2018  www.prudential.co.uk  — EEV basis operating profit, including  embedded value in-force profit,  increased 19 per cent (15 per cent   on an actual exchange rate basis) to  £7,563 million. EEV basis shareholders’  equity was up 11 per cent at  £49.8 billion.  — Underlying free surplus generation2,  (11 per cent on an actual exchange rate  basis), after financing new business  growth. This was driven by in-force  growth of 10 per cent combined with  a lower level of investment in new UK  and Europe business as a result of  management actions to optimise capital  absorption. our preferred measure of cash  generation, from our life and asset  management businesses, increased by  14 per cent to £4,047 million   — Group shareholders’ Solvency II capital surplus5 was estimated at  £17.2 billion at 31 December 2018,  equivalent to a cover ratio of  232 per cent6 (31 December 2017:  £13.3 billion, 202 per cent). The  improvement in the period reflects the  continuing strength of the Group’s  operating capital generation, and a net  £1.2 billion increase in qualifying debt.  — Full year ordinary dividend  increased by 5 per cent to 49.35 pence  per share, reflecting our 2018  performance and our confidence in the  future prospects of our businesses. IFRS profit Operating profit before tax based on longer-term Actual exchange rate Constant exchange rate 2018  £m 2017  £m Change  % 2017  £m Change  % investment returns Asia Long-term business Asset management Total US Long-term business Asset management  Total UK and Europe Long-term business General insurance commission Total insurance operations Asset management Total Other income and expenditure Total operating profit based on longer-term investment returns  before tax and restructuring costs Restructuring costs Total operating profit based on longer-term investment returns before tax Non-operating items: Short-term fluctuations in investment returns on  shareholder-backed business Amortisation of acquisition accounting adjustments (Loss) gain on disposal of businesses and corporate transactions Profit before tax Tax charge attributable to shareholders' returns Profit for the year IFRS earnings per share 1,982 182 2,164 1,911 8 1,919 1,138 19 1,157 477 1,634 (725) 4,992 (165) 1,799 176 1,975 2,214 10 2,224 861 17 878 500 1,378 (775) 4,802 (103) 10 3 10 (14) (20) (14) 32 12 32 (5) 19 6 4 (60) 1,727 171 1,898 2,137 9 2,146 861 17 878 500 1,378 (769) 4,653 (103) 4,827 4,699 3 4,550 (558) (46) (588) 3,635 (622) 3,013 (1,563) (63) 223 3,296 (906) 2,390 64 27 n/a 10 31 26 (1,514) (61) 218 3,193 (876) 2,317 15 6 14 (11) (11) (11) 32 12 32 (5) 19 6 7 (60) 6 63 25 n/a 14 29 30 Basic earnings per share based on operating profit after tax Basic earnings per share based on total profit after tax 156.6 116.9 145.2 93.1 8 26 140.4 90.0 12 30 Actual exchange rate Constant exchange rate 2018  pence 2017  pence  Change  % 2017  pence Change  % www.prudential.co.uk  Annual Report 2018  Prudential plc  39 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationAdjusted IFRS operating profit based on longer-term investment returns (operating profit) 2018 total operating profit increased by  6 per cent (3 per cent on an actual  exchange rate basis) to £4,827 million. Asia total operating profit of  £2,164 million was 14 per cent higher than  the previous year (10 per cent on an actual  exchange rate basis). Operating profit from  life insurance operations increased  15 per cent to £1,982 million (10 per cent  on an actual exchange rate basis), reflecting  the continued growth of our in-force book  of recurring premium business, with  renewal insurance premiums7 reaching  £12,856 million (2017: £11,087 million).  Insurance margin was up 15 per cent,  driven by our continued focus on health  and protection business, now contributing  to 70 per cent of Asia life insurance  revenues8 (2017: 68 per cent). At a market  level, growth was led by Hong Kong up  33 per cent, Singapore 22 per cent and  China 20 per cent respectively.  Eastspring’s operating profit increased  by 6 per cent (up 3 per cent on an actual  exchange rate basis) to £182 million  reflecting 4 per cent revenue growth  which, combined with positive operating  leverage, resulted in an improvement in  the cost-income ratio7 to 55 per cent  (2017: 56 per cent on an actual exchange  rate basis). US total operating profit at  £1,919 million decreased by 11 per cent  (14 per cent on an actual exchange rate  basis). Higher fee income was more than  offset by higher market-related DAC  amortisation and lower spread-based  income. Although equity markets declined  in the fourth quarter, average separate  account balances were above the prior  year, given positive net inflows which  supported higher levels of fee income. The  higher market-related DAC amortisation  arises mainly from £194 million acceleration  of amortisation compared with £83 million  favourable deceleration in 2017 (on a  constant exchange rate basis), leading to  an adverse year-on-year movement of  £277 million. Excluding the acceleration  and deceleration in 2018 and 2017,  operating profit in 2018 would have been  2 per cent higher than 2017 on a constant  exchange rate basis. The variability in DAC  from year-on-year is dependent on  separate account return and its interaction  with the mean reversion formula applied  by Jackson when determining the  amortisation charge for the year. In the  current year the dominant factors driving  this calculation have been the equity  market falls in 2018 (whereas 2017 saw  equity market rises). Spread-based income  decreased 20 per cent (22 per cent on an  actual exchange rate basis), as anticipated,  reflecting the impact of lower yields on our  fixed annuity portfolio and a reduced  contribution from asset duration swaps.  While we expect these effects to continue  to compress spread margins, the continued  upwards movements in US reinvestment  yields may help to reduce the speed of the  decline. UK and Europe total operating profit  was 19 per cent higher at £1,634 million.  Life insurance operating profit increased  by 32 per cent to £1,138 million (2017:  £861 million). Within this total, the  contribution from our core3 with-profits  and in-force annuity business was  £519 million (2017: £597 million), including  an increased transfer to shareholders from  the with-profits funds of £320 million  (2017: £288 million) and within this, a  30 per cent increase in the contribution  from PruFund business of £55 million.  Earnings from our core3 annuities business  were lower, reflecting the reinsurance of  £12 billion of annuity liabilities to Rothesay  Life in March 2018. The balance of the life  insurance result reflects the contribution  from other elements which are not  expected to recur at the same level. This  includes the favourable impact of longevity  assumption changes, contributing  £441 million (2017: £204 million) relating  to changes to annuitant mortality  assumptions reflecting recent mortality  trends, which have shown a slowdown  in life expectancy improvements in  recent periods, and the adoption of the  Continuous Mortality Investigation  (CMI) 2016 model (2017: adoption of  2015 model). The result also includes a  £166 million insurance recovery, related  to the costs of reviewing internally vesting  annuities sold without advice after July  2008. Profits from management actions  of £58 million were broadly offset by a  provision of £55 million for the cost of  equalising guaranteed minimum pension  benefits on products sold by the UK  insurance business, following a High Court  ruling in October which applied across the  UK life insurance industry. Asset management operating profit  decreased 5 per cent to £477 million,  largely reflecting a normalisation of  performance fees to £15 million, compared  with a particularly high contribution of  Operating profit by business   % vs 2017 45% (19)% £4,827m +6% (+3% AER) 34% 40%   Asia £2,164m, +14% (+10% AER)   US £1,919m, -11% (-14% AER)   M&GPrudential £1,634m, +19%   Other £(890)m, -2% (-1% AER) £53 million in the prior year. Excluding  the contribution of performance fees,  operating profit was 3 per cent higher.  This reflects both the higher average level  of funds managed by M&G (up from  £275.9 billion in 2017 to £276.6 billion in  2018) and a higher revenue margin9 of  40 basis points (2017: 37 basis points).  Operating profit is after charges of  £27 million incurred in preparing the  business for the UK’s proposed exit  from the European Union, including the  migration of fund assets to our  Luxembourg-domiciled SICAV platform.  The cost-income ratio7 of 59 per cent  remains broadly in line with the prior year  (2017: 58 per cent). Life insurance profit drivers We track the progress that we make in  growing our life insurance business by  reference to the scale of our obligations to  our customers, which are referred to in the  financial statements as policyholder  liabilities. Each period these increase as we  write new business and collect regular  premiums from existing customers and  decrease as we pay claims and policies  mature. These policyholder liabilities  contribute, for example, to our ability to  earn fees on the unit-linked element and  indicates the scale of the insurance  element, another key source of profitability  for the Group. 40  Prudential plc  Annual Report 2018  www.prudential.co.uk Chief Financial Officer’s report on the 2018 financial performance continuedShareholder-backed policyholder liabilities and net liability flows10 2018  £m Actual exchange rate 2017  £m Actual exchange rate Asia US UK and Europe Total Group 37,402 180,724 56,367 274,493 At 1 January Net liability flows11 Market and other movements (56) 5,089 (12,833) At 31 December 40,597 185,600 40,760 3,251 (213) (2,774) 264 (7,800) 266,957 At 1 January Net liability flows11 Market and other movements 32,851 177,626 56,158 266,635 2,301 3,137 (2,721) 2,717 2,250 (39) 2,930 5,141 At 31 December 37,402 180,724 56,367 274,493 Focusing on business supported by  shareholder capital, which generates the  majority of the life profit, in 2018 net flows  into our businesses were overall positive at  £0.3 billion driven by our Asian operations.  In the US, net outflows were £0.2 billion  with positive separate account net inflows  of £1.1 billion being more than offset by  general account net outflows of  £1.3 billion, as a result of higher surrenders  as the portfolio develops. In the UK and  Europe, the net outflows principally reflect  the run-off of the in-force annuity portfolio  following our effective withdrawal from  selling new annuity business. Market  and other movements have reduced  shareholder-back liabilities by £7.8 billion.  This includes the removal of £10.9 billion4  of UK annuity liabilities, representing the  portion of the £12 billion4 reinsured  liabilities that will be subject to a Part VII  transfer to Rothesay Life, following their  reclassification as held for sale, offset by  additions of £4.1 billion in Jackson as a  result of the agreement in November 2018  to reinsure a portfolio of business from  John Hancock. The remaining £1.0 billion  primarily reflects the effects of negative  investment markets offset by currency  effects as sterling weakened over the  period. In total, business flows and market  movements have decreased shareholder- backed policyholder liabilities from  £274.5 billion to £267.0 billion. Policyholder liabilities and net liability flows in with-profits business10,12 2018  £m Actual exchange rate 2017  £m Actual exchange rate Asia UK and Europe Total Group At 1 January Net liability flows11 36,437 124,699 161,136 5,165 3,209 8,374 Market and other movements 564 (3,779) (3,215) At 31 December 42,166 124,129 166,295 At 1 January Net liability flows11 29,933 113,146 143,079 4,574 3,457 8,031 Market and other movements 1,930 8,096 10,026 At 31 December 36,437 124,699 161,136 Policyholder liabilities in our with-profits  business have increased by 3 per cent to  £166.3 billion reflecting the popularity of  our participating funds in Asia and PruFund  in the UK, as consumers seek protection  from some of the short-term ups and  downs of direct stock market investments  by using an established smoothing process.  Across our Asia and UK and Europe  operations, net liability flows increased to  £8.4 billion. As returns from these funds  are smoothed and shared with customers,  the emergence of shareholder profit is  more gradual. This business, nevertheless,  remains an important source of future  shareholder value. www.prudential.co.uk  Annual Report 2018  Prudential plc  41 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationAnalysis of long-term insurance business pre-tax adjusted IFRS operating profit based on longer-term investment returns by driver Actual exchange rate Constant exchange rate 2018 2017 2017 Operating profit £m Average liability £m Margin bps Operating profit £m Average liability £m Margin bps Operating profit £m Average liability £m 899 85,850 2,711 175,443 391 147,318 105 155 27 1,122 88,908 2,609 166,839 347 136,474 126 156 25 1,090 87,553 2,518 162,267 345 136,496 2,480 2,254 2,302 2,287 2,223 2,210 Margin bps 124 155 25 (2,319) 6,802 (2,413) 265,597 (34)% (91) (2,443) 6,958 (2,305) 261,114 (35)% (88) (2,364) 6,767 (2,231) 255,313 (35)% (87) 216 242 4,461 570 5,031 505 234 4,658 216 4,874 490 228 4,509 216 4,725 Spread income Fee income  With-profits Insurance margin Margin on revenues Expenses:   Acquisition costs*   Administration expenses   DAC adjustments Expected return on shareholder assets Other items† Long-term business adjusted IFRS  operating profit based on longer- term investment returns * The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. The acquisition costs include only those relating to shareholder-backed business. † Other items includes share of related tax charges from joint ventures and associate and other items considered non-core to the UK and Europe business, see note I(a) of the Additional  unaudited financial information. Analysis of long-term insurance business operating profit by driver £m (% vs 2017) £4,874m 1,122 2,302 £4,725m 1,090 2,223 £5,031m 899 2,480 2,609 2,518 2,711   Spread income   Insurance margin   Fee income   Other margins and expenses   Growth vs 2017 on a constant  exchange rate basis (1,159) (1,106) (1,059) 2017 AER 2017 CER 2018 -18% +12% +8% +4% We continue to maintain our preference  for high-quality sources of income such as  insurance margin from life and health and  protection business, and fee income. We  favour insurance margin because it is  relatively insensitive to the equity and  interest rate cycle and prefer fee income to  spread income because it is more capital- efficient. In line with this approach, on a  constant exchange rate basis, insurance  margin has increased by 12 per cent (up  8 per cent on an actual exchange rate basis)  and fee income by 8 per cent (up 4 per cent  on an actual exchange rate basis), while as  anticipated, spread income decreased by  18 per cent (down 20 per cent on an actual  exchange rate basis). Administration  expenses increased to £2,413 million  (2017: £2,231 million) as the business  continues to expand in Asia, alongside  higher asset-based commissions within  the US business, which are treated as an  administrative expense in this analysis. Asset management profit drivers Movements in asset management operating  profit are also influenced primarily by  changes in the scale of these businesses, as  measured by funds managed on behalf of  external institutional and retail customers  and our internal life insurance operations. 42  Prudential plc  Annual Report 2018  www.prudential.co.uk Chief Financial Officer’s report on the 2018 financial performance continuedAsset management external net flows and external funds under management13,14 £m Net flows £(11,501)m Net flows £20,478m 17,337 3,141 1,495 15,248 182,519 7,714 38,042 136,763 219,740 9,317 46,568 163,855 (9,915) (1,586) 1,500 (1,736) 208,003 11,602 49,455 146,946 1 Jan 2017 M&GPrudential asset management Asia asset management15 MMF Market and other movements 31 Dec 2017 M&GPrudential asset management Asia asset management15 MMF Market and other movements 31 Dec 2018 M&GPrudential’s external asset  management net outflows were £9.9 billion  (2017: net inflows of £17.3 billion) driven  by the expected redemption of a single  £6.5 billion low-margin institutional  mandate, and net outflows from wholesale  and direct clients from bond and equity  classes in volatile financial markets.  This was partially offset by inflows into  multi-asset wholesale offerings and other  institutional business products, including  public debt and illiquid credit strategies.  Internal life insurance assets under  management were £174.3 billion (2017:  £186.8 billion) benefiting from PruFund net  flows of £8.5 billion, offset by the effect of  the £12 billion4 annuities reinsurance and  lower equity market levels. As a result,  total M&GPrudential assets under  management16 reduced to £321.2 billion  (2017: £350.7 billion).  Eastspring’s external assets under  management, excluding money market  funds, increased by 6 per cent (on an  actual exchange rate basis) to £49.5 billion,  reflecting the acquisition of TMB Asset  Management, which added £9 billion,  offset by client outflows and adverse  market movements. Higher internal assets  under management, driven by inflows into  the life business and money market funds,  lifted Eastspring’s total assets under  management to £151.3 billion. Other income and expenditure and restructuring costs Other income and expenditure consists  of interest payable on core structural  borrowings, corporate expenditure and  other income. These items, together with  restructuring costs, increased 2 per cent  to a net charge of £890 million (2017:  £872 million). This reflects higher  restructuring costs of £165 million (2017:  £103 million), partly offset by a lower  interest expense. Restructuring costs  include investment spend of £99 million  in relation to M&GPrudential merger and  transformation bringing the cumulative  cost to £143 million, on an IFRS basis, since  the project began. Other restructuring  costs relate to efficiency and change  programmes across the Group, for example  the rationalisation of US locations in 2018. IFRS basis non-operating items Non-operating items consist of short-term  fluctuations in investment returns on  shareholder-backed business of negative  £558 million (2017: negative  £1,514 million), the results attaching to  disposal of businesses of negative  £588 million (2017: positive £218 million),  and the amortisation of acquisition  accounting adjustments of negative  £46 million (2017: negative £61 million)  arising mainly from the REALIC business  acquired by Jackson in 2012. The loss  related to the disposal of businesses relates  primarily to the £508 million pre-tax loss  following the reinsurance of £12 billion4 UK  annuities to Rothesay Life in March 2018. Short-term fluctuations in investment  returns on shareholder-backed business  are discussed further below. IFRS basis short-term fluctuations in investment returns on shareholder-backed business Operating profit is based on longer-term  investment return assumptions. The  difference between actual investment  returns recorded in the income statement  and the assumed longer-term returns is  reported within short-term fluctuations in  investment returns.  In 2018, the total short-term fluctuations in  investment returns on shareholder-backed  business were negative £558 million (2017:  negative £1,563 million on an actual  exchange rate basis) and comprised  negative £512 million (2017: negative  £1 million on an actual exchange rate basis)  for Asia, negative £100 million (2017:  negative £1,568 million on an actual  exchange rate basis) in the US, positive  £34 million (2017: negative £14 million on  an actual exchange rate basis) in the UK  and Europe and positive £20 million (2017:  positive £20 million on an actual exchange  rate basis) in other operations. Rising interest rates in many territories in  Asia led to unrealised bond losses in the  period. In the US, lower equity market  levels, alongside higher interest rate levels,  as expected, resulted in gains on equity  hedge instruments which are designed to  protect Jackson’s capital position, balanced  by higher technical reserve requirements. www.prudential.co.uk  Annual Report 2018  Prudential plc  43 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationIFRS basis effective tax rates In 2018, the effective tax rate on operating  profit was 16 per cent (2017: 21 per cent),  reflecting the reduction in the US federal  tax rate from 35 per cent in 2017 to  21 per cent in 2018. The 2018 effective tax rate on the total  IFRS profit was 17 per cent (2017:  14 per cent after excluding the one-off  impact of the re-measurement of US  deferred tax balances, following the  enactment in December 2017 of tax  reform in the US). The increase in the  2018 effective tax rate reflects non-tax  deductible investment losses in Asia  operations. The main driver of the Group’s effective tax  rate is the relative mix of the profits between  jurisdictions with higher tax rates (such as  Indonesia and Malaysia), jurisdictions with  lower tax rates (such as Hong Kong and  Singapore), and jurisdictions with rates in  between (such as the UK and the US). Total tax contribution The Group continues to make significant  tax contributions in the jurisdictions in  which it operates, with £2,839 million  remitted to tax authorities in 2018. This  was similar to the equivalent amount of  £2,903 million remitted in 2017.  Tax strategy In May 2018, the Group published its  updated tax strategy which, in addition  to complying with the mandatory UK  (Finance Act 2016) requirements,  also included a number of additional  disclosures, including a breakdown  of revenues, profits and taxes for all  jurisdictions where more than £5 million  tax was paid. This disclosure was included  as a way of demonstrating that our tax  footprint (ie where we pay taxes) is  consistent with our business footprint.  An updated version of the tax strategy,  including 2018 data, will be available on  the Group’s website before 31 May 2019. New business performance Life EEV new business profit and APE new business sales (APE sales) Actual exchange rate Constant exchange rate 2018  £m 2017  £m Change  % 2017  £m Change  % APE sales New business profit APE sales New business profit APE sales New business profit APE sales New business profit APE sales New business profit 3,744 1,542 1,516 6,802 2,604 921 352 3,877 3,805 1,662 1,491 6,958 2,368 906 342 3,616 (2) (7) 2 (2) 10 2 3 7 3,671 1,605 1,491 6,767 2,282 874 342 3,498 2 (4) 2 1 14 5 3 11 Asia US UK and Europe Total Group Life insurance new business profit  was up 11 per cent (7 per cent on an actual  exchange rate basis) to £3,877 million, and  life insurance new business APE sales increased by 1 per cent (decreased by  2 per cent on an actual exchange rate basis)  to £6,802 million, including an increase of  4 per cent during the second half of 2018  compared with the second half of 2017,  led by 8 per cent growth in Asia.  In Asia, new business profit was  14 per cent higher at £2,604 million  (10 per cent on an actual exchange rate  basis), benefiting from pricing actions and  our strategic focus on health and  protection sales. This growth was also  supported by increasing sales momentum,  with APE growth of 8 per cent during the  second half of 2018 compared with the  second half of 2017. Our focus on quality is undiminished, with  regular premium contracts accounting for  94 per cent of APE sales as well as the mix  of health and protection products  increasing to 28 per cent of APE sales.  Overall, new business profit from health  and protection products was 15 per cent  higher and contributed 70 per cent of the  total in Asia. This favourable mix provides  a high level of recurring income and an  earnings profile that is significantly less  correlated to investment markets. The performance remains broad-based,  with 10 markets delivering double-digit  percentage growth in new business profit.  In Hong Kong, new business profit  increased by 17 per cent, driven largely  by our ongoing focus on increasing health  and protection sales, particularly those  with more comprehensive coverage.  Hong Kong APE sales increased by  3 per cent overall, with higher sales levels  from Mainland China visitors to Hong Kong  driving positive momentum over the  course of the year, culminating in APE sales  growth of 18 per cent in the discrete fourth  quarter. In China, new business profit  increased by 14 per cent, reflecting positive  product mix effects, and APE sales growth  of 27 per cent in the fourth quarter. In  Singapore, new business profit increased  by 15 per cent on higher APE sales (up  5 per cent), driven by our agency and  bancassurance channels, pricing actions  and favourable product mix shifts. Growth  in new business profit in Thailand (up  75 per cent), Vietnam (up 29 per cent) and  Malaysia (up 13 per cent) reflects our value  focus and favourable shifts in product mix.  New business performance £m (% vs 2017)  55% 9% 67% 22% 24% % 23% Split of APE new business sales £6,802m, +1% (-2% AER)   Asia £3,744m, +2% (-2% AER)   US £1,542m, -4% (-7% AER)   M&GPrudential £1,516m, +2% Split of new business profit £3,877m, +11% (+7% AER)   Asia £2,604m, +14% (+10% AER)   US £921m, +5% (+2% AER)   M&GPrudential £352m, +3% 44  Prudential plc  Annual Report 2018  www.prudential.co.uk Chief Financial Officer’s report on the 2018 financial performance continued Our Indonesia business continues to  experience challenging conditions which,  compounded by the adverse impact of  higher yields, drove new business profit  lower by 23 per cent. Despite these  headwinds, we are investing in the  business to strengthen our distribution  capabilities, upgrading our systems and  refreshing our product propositions to  meet customer needs. Free surplus generation2 In the US, new business profit increased  by 5 per cent to £921 million (up 2 per cent  on an actual exchange rate basis) as a  4 per cent reduction in new APE sales was  more than balanced by the favourable  effect of higher interest rates and spread  assumption changes compared with the  prior period.  In our UK and Europe life business, new  business profit increased to £352 million,  up 3 per cent supported by 2 per cent  growth in APE sales. New sales continue  to be driven by the popular PruFund  proposition with APE sales up 3 per cent.  Reflecting this performance, total PruFund  assets under management of £43 billion as  at 31 December 2018 were 20 per cent  higher than at the start of the year, driven  by positive net flows of £8.5 billion. Actual exchange rate Constant exchange rate 2018  £m 2017  £m Change  % 2017  £m Change  % Free surplus generation Asia US UK and Europe Underlying free surplus generated from in-force life business  and asset management before restructuring costs Restructuring costs Underlying free surplus generated from in-force life   business and asset management Investment in new business Underlying free surplus generated Market related movements, timing differences   and other non-operating movements Profit attaching to corporate transactions Net cash remitted by business units Total movement in free surplus Free surplus at end of year 6 4 13 8 (62) 7 11 11 1,493 1,527 1,486 4,506 (77) 4,429 (886) 3,543 11 8 13 11 (62) 10 8 14 1,659 1,644 1,684 4,987 (125) 4,862 (815) 4,047 (1,282) 283 (1,732) 1,316 8,894 1,562 1,582 1,486 4,630 (77) 4,553 (913) 3,640 (1,012) 172 (1,788) 1,012 7,578 Free surplus generation is the financial  metric we use to measure the internal cash  generation of our business operations and  is based on the capital regimes that apply  locally in the various jurisdictions in which  our life businesses operate. For life  insurance operations it represents amounts  maturing from the in-force business during  the year, net of amounts reinvested in  writing new business. For asset  management businesses, it equates to  post-tax operating profit for the period.  We drive free surplus generation by  targeting markets and products that have  low capital strain, high-return and fast  payback profiles and by delivering both  good service and value to improve  customer retention. Our ability to generate  both growth and cash is a distinctive  feature of Prudential.  In 2018, underlying free surplus generation  from our life insurance and asset  management business, before investment  in new business, increased by 10 per cent  to £4,862 million (increased by 7 per cent  on an actual exchange rate basis), reflecting  increased contributions from all our  businesses. In Asia, growth in the in-force  life portfolio, combined with post-tax asset  management profit from Eastspring,  contributed to free surplus generation of  £1,659 million, up 11 per cent. In the US,  in-force free surplus generation increased  by 8 per cent reflecting higher in-force  values. In the UK and Europe, in-force free  surplus generation increased by 13 per cent  to £1,684 million, including the positive  impact of longevity assumption changes,  and the £138 million post-tax insurance  recovery for the costs of the UK review of  past non-advised annuity sales practices  and related potential redress. In 2017 free  surplus was reduced by an increase in the  related provision of £187 million to cover  such costs. Although new business profit increased  by 11 per cent, the amount of free surplus  invested in writing new life business in the  period was lower at £815 million (2017:  £886 million) primarily reflecting lower sales  in the US and measures taken to optimise  capital absorption in the UK and Europe. After funding cash remittances from the  business units to the Group, recognition  of the profit attaching to the disposal of  businesses, and other movements, which  includes market movements, the closing  value of free surplus in our life and asset  management operations was £8.9 billion  at 31 December 2018.  We continue to manage cash flows across  the Group with a view to achieving a  balance between ensuring sufficient  remittances are made to service central  requirements (including paying the  external dividend) and maximising value  to shareholders through retention and  reinvestment of capital in business  opportunities. www.prudential.co.uk  Annual Report 2018  Prudential plc  45 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationActual exchange rate 2018  £m 2017  £m 699 342 654 37 1,732 3,236 645 475 643 25 1,788 2,264 Business unit remittance17 Net cash remitted by business units: Asia US UK and Europe Other UK (including Prudential Capital) Net cash remitted by business units Holding company cash at 31 December  Movement in central cash17 £m 1,732 (1,244) 914 3,236 (430) 2,264 1 Jan 2018 Cash remitted to Group by business units Dividends paid Central costs Corporate activities/other 31 Dec 2018   2017 second interim dividend and 2018 first interim dividend Cash remitted to the Group by business  units in 2018 amounted to £1,732 million,  driven by higher remittances from Asia,  demonstrating the quality and scale of its  growth. Jackson made remittances of  £342 million, although lower than the  prior period. The remittance from  M&GPrudential of £654 million was  2 per cent higher than the combined  remittance in 2017, with an increase in the  with-profits transfer from £215 million in  2017 to £233 million in 2018. Cash remitted to the Group in 2018 was  used to meet central costs of £430 million  (2017: £470 million) and pay the 2017  second interim and 2018 first interim  dividends. As well as these movements  were corporate activities and other cash  flows of positive £914 million (2017:  negative £521 million), primarily driven by  net debt issuance of £1.2 billion within the  year. This led to holding company cash  increasing from £2,264 million to  £3,236 million over 2018. 46  Prudential plc  Annual Report 2018  www.prudential.co.uk Chief Financial Officer’s report on the 2018 financial performance continuedPost-tax profit – EEV Post-tax operating profit based on longer-term investment returns Asia Long-term business Asset management Total US Long-term business Asset management Total UK and Europe Long-term business General insurance commission Total insurance operations Asset management Total Other income and expenditure Post-tax operating profit based on longer-term investment returns  before restructuring costs Restructuring costs Post-tax operating profit based on longer-term investment returns Non-operating items: Short-term fluctuations in investment returns Effect of changes in economic assumptions Mark to market value on core structural borrowings Impact of US tax reform (Loss) gain on disposal of businesses and corporate transactions Post-tax profit for the year Earnings per share – EEV Actual exchange rate Constant exchange rate 2018  £m 2017  £m Change  % 2017  £m Change  % 4,387 159 4,546 2,115 3 2,118 1,374 15 1,389 392 1,781 3,705 155 3,860 2,143 7 2,150 1,015 13 1,028 403 1,431 (726) (746) 7,719 (156) 7,563 (3,219) 146 549 – (451) 4,588 6,695 (97) 6,598 2,111 (102) (326) 390 80 8,751 18 3 18 (1) (57) (1) 35 15 35 (3) 24 3 15 (61) 15 n/a n/a n/a n/a n/a (48) 3,562 150 3,712 2,069 7 2,076 1,015 13 1,028 403 1,431 (740) 6,479 (97) 6,382 2,057 (91) (326) 376 77 8,475 23 6 22 2 (57) 2 35 15 35 (3) 24 2 19 (61) 19 n/a n/a n/a n/a n/a (46) Basic earnings per share based on post-tax operating profit Basic earnings per share based on post-tax total profit 293.6 178.1 257.0 340.9 14 (48) 248.6 330.2 18 (46) Actual exchange rate Constant exchange rate 2018  pence 2017  pence Change  % 2017  pence Change  % EEV operating profit On an EEV basis, Group post-tax operating  profit based on longer-term investment  return increased by 19 per cent (up  15 per cent on an actual exchange rate  basis) to £7,563 million in 2018. EEV operating profit includes new business  profit from the Group’s life business, which  increased by 11 per cent (up 7 per cent on  an actual exchange rate basis) to  £3,877 million. It also includes in-force life  business profit of £3,999 million, which  was 27 per cent higher than prior year (up  23 per cent on an actual exchange rate  basis), primarily reflecting the growth in our  in-force business and higher interest rates.  This is most evident in the profit from the  unwind of the in-force business, which  was 22 per cent higher at £2,573 million.  Experience and assumption changes were  positive at £1,426 million (2017:  £1,044 million), reflecting the continuing  performance of our in-force policies. In Asia, EEV life operating profit was up  23 per cent to £4,387 million, driven by  14 per cent growth in new business profit  and 39 per cent growth in in-force profit,  reflecting the growth of the in-force  business and positive assumption changes  and experience variances, as a result of the  high quality of the existing portfolio.  Jackson’s EEV life operating profit was up  2 per cent to £2,115 million. This reflects a  5 per cent increase in new business profit  to £921 million and higher expected  returns from the in-force business due to  prior period growth and higher interest  rates, partially offset by a reduced level  of favourable assumption changes and  experience variances. In the UK and Europe, EEV life operating  profit increased by 35 per cent to  £1,374 million (2017: £1,015 million). This  was as a result of a 3 per cent increase in  new business profit, and higher in-force  profit which included a £330 million benefit  from revisions to longevity assumptions  and a £138 million insurance recovery  related to the costs of reviewing past  annuity sales after 1 July 2008, for which a  provision of £187 million had been charged  in the prior period. www.prudential.co.uk  Annual Report 2018  Prudential plc  47 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationEEV operating profit by business % vs 2017  Capital position, financing and liquidity Capital position Analysis of movement in Group shareholder Solvency II surplus18 (12)% 58% 8% £7,563m +19% (+15% AER) 18% 28%   Asia life £4,387m, +23% (+18% AER)   US life £2,115m, +2% (-1% AER)   M&GPrudential life £1,374m, +35%   Asset management and general insurance   £569m, -1% (-2% AER)   Other £(882)m, -5% (-5% AER) EEV non-operating items Negative short-term fluctuations of  £3,219 million primarily reflect lower than  expected returns on equities and other  investments held by the Group’s US  separate accounts and by the with-profits  and unit-linked funds businesses in Asia  and the UK. These negative effects have  been partly offset by gains on equity  derivatives held by the US business to  manage market exposures arising  from the guarantees provided on its  annuity products.  Offsetting short-term fluctuations is a  £146 million benefit from economic  assumption changes, principally reflecting  the impact of higher interest rates on the  projected future fund growth rates for  certain businesses written in Hong Kong  and Singapore and the variable annuity  business in the US. These projected higher  growth rates increase fund values for  policyholders and hence profitability for  shareholders. The loss attaching to corporate  transactions of £451 million primarily  relates to the reinsurance of the  shareholder annuity portfolio to Rothesay  Life. A more detailed explanation of this  and other corporate transactions occurring  in the period are set out in note 17 of the  EEV financial statements. Solvency II surplus at 1 January Operating experience Non-operating experience (including market movements) M&GPrudential transactions (see below) Other capital movements: Net subordinated debt issuance (redemption) Foreign currency translation impacts Dividends paid Model changes Estimated Solvency II surplus at 31 December 2018  £bn 2017  £bn 13.3 4.2 (1.2) 0.4 1.2 0.5 (1.2) – 17.2 12.5 3.6 (0.6) – (0.2) (0.7) (1.2) (0.1) 13.3 The high quality and recurring nature of  our operating capital generation and our  disciplined approach to managing balance  sheet risk has resulted in an increase in the  Group’s shareholders’ Solvency II capital  surplus5 which is estimated at £17.2 billion  at 31 December 2018 (equivalent to a  solvency ratio of 232 per cent6), compared  with £13.3 billion (202 per cent) at  31 December 2017. The increase in surplus  was driven by operating capital formation  of £4.2 billion and a £1.2 billion net increase  in subordinated debt, offset by dividends  to shareholders of £1.2 billion. Local statutory capital All of our subsidiaries continue to hold  appropriate capital levels on a local  regulatory basis. In the UK and Europe,  at 31 December 2018 The Prudential  Assurance Company Limited and its  subsidiaries had an estimated Solvency II  shareholder surplus19 of £3.7 billion  (equivalent to a cover ratio of 172 per cent),  reflecting the impact from the reinsurance  Solvency II surplus18 £bn of £12 billion of annuity liabilities and  the transfer of the Group’s Hong Kong  insurance subsidiaries. The UK with-profits  surplus20 is estimated at £5.5 billion  (equivalent to a cover ratio of 231 per cent).  In the US, operational capital formation and  the strong performance of our hedging  programme as equity markets weakened  during the fourth quarter of 2018 more  than offset remittances to Group and  a 35 percentage point ratio impact from  the incorporation of tax reform into the  statutory capital requirement, resulting in  a risk-based capital ratio of 458 per cent  (2017: 409 per cent). Debt portfolio The Group continues to maintain a  high-quality defensively positioned debt  portfolio. Shareholders’ exposure to credit is  concentrated in the UK and Europe annuity  portfolio and the US general account, mainly  attributable to Jackson’s fixed annuity  portfolio. The credit exposure is well  diversified and 98 per cent of our UK and  Europe portfolio and 96 per cent of our US  portfolio are investment grade21. During  2018, default losses were minimal and  reported impairments across the UK and US  portfolios were £4 million (2017: £2 million). 17.2 13.3 202% 232% 31 Dec 2017 31 Dec 20185   Solvency II cover ratio6 48  Prudential plc  Annual Report 2018  www.prudential.co.uk Chief Financial Officer’s report on the 2018 financial performance continuedPrudential’s holding company currently has  access to £2.6 billion of syndicated and  bilateral committed revolving credit  facilities provided by 19 major international  banks, expiring in 2023. Apart from small  drawdowns to test the process, these  facilities have never been drawn, and there  were no amounts outstanding at  31 December 2018. The medium-term  note programme, the US shelf programme  (platform for issuance of SEC registered  public bonds in the US market), the  commercial paper programme and the  committed revolving credit facilities are all  available for general corporate purposes  and to support the liquidity needs of  Prudential’s holding company, and are  intended to maintain a flexible funding  capacity. Net core structural borrowings £m (EEV basis) 4,759 743 4,016 4,611 183 4,428 20% 20% 2017 2018   IFRS basis of value of net core structural borrowings   Mark to market value   Gearing ratio* *  Net core structural borrowings as proportion of IFRS  shareholders’ funds plus net debt, as set out in note III  of the Additional unaudited financial information. Financing and liquidity The Group had central cash resources of  £3.2 billion at 31 December 2018  (31 December 2017: £2.3 billion). Total  core structural borrowings increased by  £1.4 billion, from £6.3 billion to £7.7 billion,  mainly as a result of the capital rebalancing  process related to the intended demerger  of M&GPrudential. This involved the  redemption of US$550 million (equivalent  to £432 million at 31 December 2018)  7.75 per cent tier 1 perpetual subordinated  debt in December 2018 being more than  offset by the issue of US$500 million  (£374 million at 31 December 2018)  6.5 per cent tier 2 substitutable  subordinated notes, £500 million  6.25 per cent tier 2 substitutable  subordinated notes and £750 million  5.625 per cent tier 2 substitutable  subordinated notes in October 2018. In addition to its net core structural  borrowings of shareholder-financed  businesses set out above, the Group also  has access to funding via the money  markets and has in place an unlimited  global commercial paper programme. As at  31 December 2018, we had issued  commercial paper under this programme  totalling US$599 million, to finance  non-core borrowings. Shareholders’ funds IFRS EEV 2018  £m 2017  £m 2018  £m 2017  £m Profit after tax for the year22 Exchange movements, net of related tax Cumulative exchange gain of Korea life business recycled to profit and loss account Unrealised gains and losses on Jackson fixed income securities classified  as available for sale23 Dividends Mark to market value movements on Jackson assets backing surplus and  3,010 348 – 2,389 (409) (61) 4,585 1,706 – (1,083) (1,244) 486 (1,159) – (1,244) required capital Other Net increase in shareholders’ funds Shareholders’ funds at 1 January Shareholders’ funds at 31 December Shareholders' value per share7 Return on shareholders' funds7 – 131 1,162 16,087 17,249 665p 25% – 175 1,421 14,666 16,087 622p 25% (95) 132 5,084 44,698 49,782 8,750 (2,045) – – (1,159) 40 144 5,730 38,968 44,698 1,920p 1,728p 17% 17% www.prudential.co.uk  Annual Report 2018  Prudential plc  49 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationIFRS shareholders’ funds £bn +7% 17.2 16.1 31 Dec 2017 31 Dec 2018 EEV shareholders’ funds £bn +11% 49.8 44.7 1,728p 1,920p 31 Dec 2017 31 Dec 2018   EEV value per share7 Group IFRS shareholders’ funds at  31 December 2018 increased by 7 per cent  to £17.2 billion (31 December 2017:  £16.1 billion on an actual exchange rate  basis), driven by the strength of the  operating result, offset by dividend  payments of £1,244 million. During the  period, UK sterling has weakened relative  to the US dollar and various Asian  currencies. With approximately 51 per cent  of the Group’s IFRS net assets (74 per cent  of the Group’s EEV net assets)  denominated in non-sterling currencies,  this generated a positive exchange rate  movement on the net assets in the period.  In addition, the increase in US long-term  interest rates between the start and the  end of the reporting period produced  unrealised losses on fixed income securities  held by Jackson accounted through other  comprehensive income. The Group’s EEV basis shareholders’  funds also increased by 11 per cent to  £49.8 billion (31 December 2017:  £44.7 billion on an actual exchange rate  basis), On a per share basis the Group’s  embedded value at 31 December 2018  equated to 1,920 pence, up from  1,728 pence at 31 December 2017. Corporate transactions Intention to demerge the Group’s UK and Europe businesses and reinsurance of £12.0 billion4 UK annuity portfolio The Group is making good progress on  its previously announced intention to  demerge its UK and Europe businesses  from Prudential plc, resulting in two  separately listed companies. The Group  has transferred legal ownership of The  Prudential Assurance Company Limited  (PAC) and M&G Group Limited to the  new holding company for M&GPrudential  and completed the transfer of the legal  ownership of its Hong Kong insurance  subsidiaries from PAC to Prudential  Corporation Asia Limited in  December 2018.  In March 2018, M&GPrudential reinsured  £12.0 billion (as at 31 December 2017) of  its shareholder-backed annuity portfolio  to Rothesay Life. Under the terms of the  agreement, this is expected to be followed  by a Part VII transfer of most of the  portfolio by 30 June 2019. The reinsurance  agreement became effective on 14 March  2018 and resulted in an IFRS basis pre-tax  loss of £508 million. The above transactions reduced the  Group’s EEV by £376 million which  primarily reflects the loss of profits on the  portion of the annuity liabilities reinsured  and increased the Group’s shareholder  Solvency II capital position by £0.4 billion.  Prior to the demerger, the Group expects  to rebalance its debt capital across  Prudential and M&GPrudential. This will  include the ultimate holding company of  M&GPrudential becoming an issuer of  new debt, including debt substituted from  Prudential, and Prudential redeeming  some of its existing debt. Following these  actions, the overall absolute quantum of  debt across Prudential and M&GPrudential  is currently expected to increase, by an  amount which is not considered to be  material in the context of the Group’s  total outstanding debt as at 30 June 2018,  before any substitutable debt had been  issued, of £7.6 billion (comprising the  Group’s core structural borrowings of  £6.4 billion and shareholder borrowings  from short-term fixed income securities  programme of £1.2 billion). At the time of the demerger, Prudential  expects M&GPrudential to be holding  around £3.5 billion of subordinated debt.  This expectation is subject to the  M&GPrudential capital risk appetite being  approved by the Board of the ultimate  holding company of M&GPrudential, once  fully constituted to include independent  non-executive directors, and reflects the  current operating environment and  economic conditions, material changes  in which may lead to a different outcome.  Entrance into Thailand mutual fund market In July 2018, Eastspring reached an  agreement to acquire initially 65 per cent  of TMB Asset Management Co., Ltd.  (TMBAM), a leading asset management  company in Thailand, from the TMB Bank  Public Company Limited (TMB). Thailand  is the largest fund management market  within the Association of Southeast Asian  Nations (ASEAN) with total assets under  management of £115 billion at  31 December 201824. Eastspring has an  option to increase its ownership to  100 per cent in the future. As part of this  acquisition, Eastspring has also entered  into a distribution agreement with TMB to  provide best-in-class investment solutions  to their customers. The acquisition of  TMBAM, with £9 billion of assets under  management as at 31 December 2018,  reinforces Prudential’s commitment to  the Thai market.  Acquisition of John Hancock’s group payout annuity business In November 2018, Jackson announced  an agreement with John Hancock Life  Insurance Company to reinsure  100 per cent of John Hancock’s group  payout annuity business, effective from  1 October 2018. In total, the transaction involves Jackson  indemnity reinsuring approximately  US$5.5 billion of reserves, representing  an increase in Jackson’s general account  liabilities of approximately 10 per cent.  John Hancock will continue to be  responsible for the administration  of the business. Renewal and expansion of regional strategic bancassurance alliance with UOB In January 2019, Prudential and UOB  renewed their regional bancassurance  alliance until 2034, extending the scope to  include a fifth market, Vietnam, alongside  50  Prudential plc  Annual Report 2018  www.prudential.co.uk Chief Financial Officer’s report on the 2018 financial performance continuedour existing footprint across Singapore,  Malaysia, Thailand and Indonesia.  Under the terms of the renewal,  Prudential’s life insurance products will  be distributed through UOB’s extensive  network of more than 400 branches in  five markets, providing access to over  four million UOB customers. In addition,  Prudential will use its digital capabilities to  deliver protection-focused propositions to  aid UOB’s digital bank expansion and  customer acquisition aspirations. An initial  fee of £662 million will be paid under the  agreement which will be funded through  internal resources. This amount will be paid  in three instalments. £230 million was paid  in February 2019 with £331 million to be  paid in January 2020 and £101 million to  be paid in January 2021. Acquisition of majority stake in Group Beneficial Prudential plc is acquiring a majority  stake in Group Beneficial (Beneficial),  one of the leading life insurers in  Cameroon, Côte d’Ivoire and Togo.  Beneficial provides savings and protection  products to over 300,000 customers  through 41 branches and more than 2,000  agents. The acquisition will significantly  add to Prudential’s growing scale in Africa,  and is subject to various conditions and  regulatory approvals.  Increase stated on a constant exchange rate basis. Notes 1  2  For insurance operations, underlying free surplus generated  represents amounts maturing from the in-force business  during the period less investment in new business and  excludes non-operating items. For asset management  businesses, it equates to post-tax operating profit for the  period. Restructuring costs are presented separately from  the underlying business unit amount. Further information  is set out in note 10 of the EEV basis results. 3  Core refers to the underlying profit of the UK and Europe  insurance business, excluding the effect of, for example,  management actions to improve solvency and material  assumption changes. Details of these are set out in note I(d)  of the Additional unaudited financial information. 4  Relates to IFRS shareholder annuity liabilities, valued  as at 31 December 2017. 5  The Group shareholder capital position excludes the  contribution to Own Funds and the Solvency Capital  Requirement from ring fenced with-profit funds and staff  pension schemes in surplus. The estimated solvency  positions include management’s calculation of UK  transitional measures reflecting operating and market  conditions at each valuation date, which for both 2018  and 2017 reflects the approved regulatory position.  6  Estimated before allowing for second interim ordinary  dividend. Dividend The Board has decided to increase the  full-year ordinary dividend by 5 per cent to  49.35 pence per share, reflecting our 2018  financial performance and our confidence  in the future prospects of the Group.  In line with this, the Directors have  approved a second interim ordinary  dividend of 33.68 pence per share  (2017: 32.5 pence per share). The Group’s dividend policy remains  unchanged. The Board will maintain focus  on delivering a growing ordinary dividend.  In line with this policy, Prudential aims to  grow the ordinary dividend by 5 per cent  per annum. The potential for additional  distributions will continue to be  determined after taking into account the  Group’s financial flexibility across a broad  range of financial metrics and an  assessment of opportunities to generate  attractive returns by investing in specific  areas of the business25. Mark FitzPatrick Chief Financial Officer 10 Includes Group’s proportionate share of the liabilities  and associated flows of the insurance joint ventures  and associates in Asia. 11  Defined as movements in policyholder liabilities arising  from premiums (net of charges), surrenders/withdrawals,  maturities and deaths. 12  Includes unallocated surplus of with-profits business. 13  Includes Group’s proportionate share in PPM South Africa  and the Asia asset management joint ventures. 14 For our asset management business, the level of funds  managed on behalf of third parties, which are not therefore  recorded on the balance sheet, is a driver of profitability.  We therefore analyse the movement in the funds under  management each period, focusing between those which  are external to the Group and those held by the insurance  business and included on the Group balance sheet. This is  analysed in note II(b) of the Additional unaudited financial  information. 18 The methodology and assumptions used in calculating  the Solvency II capital results are set out in note II(c)  of the Additional unaudited financial information. 19 The UK shareholder capital position excludes the  contribution to Own Funds and the Solvency Capital  Requirement from ring-fenced with-profit funds and  staff pension schemes in surplus. The estimated solvency  positions include management’s calculation of UK  transitional measures reflecting operating and market  conditions at each valuation date, which for both 2018  and 2017 reflects the approved regulatory position.  20 The estimated solvency positions include management’s  calculation of UK transitional measures reflecting operating  and market conditions at each valuation date, which for both  2018 and 2017 reflects the approved regulatory position.  21 Based on hierarchy of Standard and Poor’s, Moody’s and  Fitch, where available and if unavailable, internal ratings  have been used.  15  Net inflows exclude Asia Money Market Fund (MMF)  22 Excluding profit for the year attributable to non-controlling  inflows of £1,500 million (2017: £1,495 million). External  funds under management exclude Asia MMF balances  of £11,602 million (2017: £9,317 million). 16 Represents M&GPrudential asset management external  funds under management and internal funds included  on the M&GPrudential long-term insurance business  balance sheet. interests. 23 Net of related charges to deferred acquisition costs and tax. 24 ©Copyright 2018 Strategic Insight, an Asset International  Company and when referenced or sourced Morningstar  Inc., Standard & Poor’s Inc., and Lipper Inc. All rights  reserved. The information, data, analyses and opinions  contained herein (a) include confidential and proprietary  information of the aforementioned companies, (b) may not  be copied or redistributed for any purpose, (c) are provided  solely for information purposes, and (d) are not warranted  or represented to be correct, complete, accurate, or timely. 25 Refer to note 11 on the parent company financial statements  for further detail on the distributable profits of Prudential plc. 7  See note III of the Additional unaudited financial information  17  Net cash remitted by business units are included in the  for definition and reconciliation to IFRS balances. 8  Asia insurance revenues include spread income, fee  income, with-profits, insurance margin and expected return  on shareholder assets. 9  Margin represents operating income before performance- related fees as a proportion of the related funds under  management, for further information see note I(c) of the  additional unaudited financial information. Holding company cash flow, which is disclosed in detail in  note II(a) of the Additional unaudited financial information.  This comprises dividends and other transfers from  business units that are reflective of emerging earnings  and capital generation. www.prudential.co.uk  Annual Report 2018  Prudential plc  51 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationGroup Chief Risk Officer’s report of the risks facing our business and how these are managed Enabling business growth and change through risk management Our Group Risk Framework and risk appetite  have allowed us to control our risk exposure  successfully throughout the year. Our  governance, processes and controls enable  us to deal with uncertainty effectively,  which is critical to the achievement of our  strategy of helping our customers achieve  their long-term financial goals. This section explains the main risks inherent  in our business and how we manage  those risks, with the aim of ensuring an  appropriate risk profile is maintained. 1. Introduction Group structure In August 2017 the Group announced  its intention to combine M&G and its  UK and Europe life business to form  M&GPrudential, allowing the scale and  capabilities in these businesses to be  leveraged more effectively. In March 2018,  the intention to demerge M&GPrudential  from the rest of the Group was announced,  with the aim of focusing on meeting  customers’ rapidly evolving needs and  to deliver enhanced long-term value to  investors as two separate businesses.  The merger activity ongoing at  M&GPrudential and its planned separation  from the rest of the Group requires  significant and complex changes and these  have been progressing apace throughout  2018. The Group Risk function is  embedded within key work streams and a  clear view exists of the objectives, risks and  dependencies involved in order to execute  this change agenda. A mature and  well-embedded risk framework is in place  and, during this period of transition, the  Group Risk function has a defined role in  providing oversight, support and risk  management, as well as providing  objective challenge to ensure the Group  remains within its risk appetite. During  2018 these activities have been in the form  of risk opinions, guidance and assurance  on critical transformation and demerger  activity, as well as assessments of the  financial risks to the execution of the  demerger under various stress scenarios.  A key objective is that post demerger there  are two strong, standalone risk functions in  M&GPrudential and Prudential plc, with  operational separation planning for the  risk functions remaining on track.  Societal developments Focus in western economies continues to  shift from the goods and services which  businesses deliver to customers towards  the way in which such business is  conducted and how this impacts on the  wider society. Stakeholder and regulatory  expectations of the Group’s environmental,  social and governance (ESG) activities are  also increasing. In undertaking its business,  the Group actively considers the ESG  implications of its activities. Recent  regulatory developments such as the EU  General Data Protection Regulation  (GDPR) have underlined that personal data  must be held securely and its use must be  transparent to the data owner. Risks  around the security and use of personal  data are actively managed by the Group,  and the recent regulatory changes in data  protection in the US and Europe have been  incorporated into the principles against  which the business requirements are  defined. The world economy The beginning of 2018 saw strong and  broad economic growth following the  significant US tax reforms enacted toward  the end of 2017. As the year progressed the  global economic backdrop evolved and a  divergence in growth between the US and  the rest of the world was observed. Rising  US policy rates, tightening financial  conditions and increasing trade tensions  raised concerns and impacted emerging  markets in particular. In the fourth quarter,  fears of a more pronounced global  economic slowdown also impacted the  US as reductions in monetary stimulus  continued, contributing to a sharp shift  in risk sentiment. At the start of 2019, the  outlook for the global economy remains  uncertain and while growth remains  positive, it has become more fragile and  risks are weighted towards the downside.  Political tensions in Europe, including  uncertainty surrounding the nature of the  UK’s exit from the EU and its future trading  relationship, geopolitical developments  and the potential increase of international  trade tensions between the US and China  pose risks to global growth and the  economic environment. Financial markets Financial markets faced a number of  headwinds in 2018 and asset valuations  suffered broadly amid the re-emergence  of market volatility. Global markets, and  emerging markets in particular, faced  broad pressure throughout the year. US  markets, however, proved resilient until the  fourth quarter when fears of an economic  slowdown triggered a sharp sell-off in  equities. In parallel, credit spreads also  widened as the position of the credit  cycle became a key concern for market  participants. Across the world, interest  rates movements were mixed over the  year, although there has been a notable  broad flattening of the yield curve in the  US, impacted by changes in growth and  inflation data, risk sentiment and increased  concerns of a possible recession. Financial  markets remain particularly vulnerable to  further abrupt changes in sentiment, and in  particular if the risks to the global economy  noted above were to materialise. Political landscape Events in the past year continue to indicate  that the world is in a period of global  geopolitical transition and increasing  uncertainty. Popular discontent remains  one of the driving factors of political  change, and the liberal norms and the role  of multilateral rules-based institutions that  underpin global order, such as the United  Nations (UN), the North Atlantic Treaty  Organisation (NATO) and the World  Trade Organisation (WTO), appear  to be evolving. Across the Group’s key  geographies, we have increasingly seen  national protectionism in trade and  economic policies. The UK’s exit from the  EU and the nature of the future relationship  remains a key political uncertainty. As a  global organisation, we develop plans to  mitigate business risks arising from this  shift and engage with national bodies  where we can in order to ensure our  policyholders are not adversely impacted.  It is clear, however, that the full long-term  impacts of these changes remain to be  seen. Regulations Prudential operates in highly regulated  markets across the globe, and the nature  and focus of regulation and laws remains  fluid. A number of national and  international regulatory developments  are in progress, with a continuing focus  on solvency and capital standards, conduct  of business, systemic risks and macro- prudential policy. Such developments will  continue to be monitored at a national and  global level and form part of Prudential’s  engagement with government policy  teams and regulators. The Group  announced in August 2018 that the Hong  Kong Insurance Authority would be the  Group-wide supervisor after the demerger  of M&GPrudential, and constructive  engagement on the future Group-wide  regulatory framework, led by the Group  Chief Risk Officer, will continue in 2019. 52  Prudential plc  Annual Report 2018  www.prudential.co.uk 2. Key internal, regulatory, economic and (geo)political events over the past 12 months Q1 2018   In March 2018 the intention to    Eastspring becomes the third  demerge M&GPrudential from the rest of  the Group is announced. £12 billion of  annuity liabilities in UK and Europe  business are reinsured to Rothesay Life  Plc. A Part VII transfer of most of the  portfolio is expected to be completed by  30 June 2019. Prudential signatory, after M&G and PPM  South Africa (PPMSA), to the UN  Principles for Responsible Investment in  February 2018.   President Xi Jinpingenters a second  term in office in China after election by  the National People’s Congress in March  2018.   A coalition government is formed in  Italy between the centre right League and  anti-establishment Five Star Movement,  after general elections in March 2018.   The US administration proposes initial  trade tariff measures (with additional  proposals announced over H1 2018),  raising trade tensions with its key G7  partners and China.    US equity markets decline rapidly,  triggering a global sell-off, with the Dow  Jones Industrial Average falling by circa  3,000 points in just two weeks. US  markets rebound over the second and  third quarters. Q2   The General Data Protection  Regulation (GDPR) goes live in the EU on  25 May 2018, increasing the rights of  individuals over the use of their personal  information by companies.   The US Department of Labor’s (DoL’s)  fiduciary rule is effectively ended after a  decision in the US courts in March 2018.  The deadline for the DoL to appeal lapses  in June. Other proposals, such as the US  Securities and Exchanges Commission’s  best interest standard, remain in  progress.   US President Trump and North Korean  Chairman Kim Jong Un meet in Singapore  on 12 June 2018 for a historic summit,  where denuclearisation of the Korean  peninsula is discussed.   The opposition Pakatan Harapan  coalition win power in Malaysia following  general elections held in May 2018.   The 22nd round of talks on the  Regional Comprehensive Economic  Partnership (RCEP) are held in Singapore  between 28 April and 8 May 2018, the  goal being to create the world’s largest  economic bloc. Negotiations continue  into 2019.   The Indonesia President approves  regulations on ‘grandfathering’ foreign  ownership of insurance companies. Q3   In August the Group announces that  the Hong Kong Insurance Authority will  become the Group-wide supervisor for  Prudential plc after the demerger of  M&GPrudential, and constructive  engagement on the future regulatory  relationship begins.   In July the International Association of    In September, the Prudential  Insurance Supervisors (IAIS) releases  consultation documents for both the  Common Framework for the Supervision  of Insurers (ComFrame) and Insurance  Capital Standard (ICS) v2.0. The Group  submits ICS field results to the PRA in  August 2018.  Regulation Authority (PRA) and Financial  Conduct Authority (FCA) request from  major banks and insurers, details of  preparations and actions being  undertaken to manage transition from  London Inter-Bank Offered Rate (LIBOR)  to alternative interest rate benchmarks.   The Bank of England raises rates for  the second time since the 2008 financial  crisis to 0.75 per cent in August, while  highlighting significant Brexit-driven  uncertainties to the economy.   The US imposes tariffs on Chinese  exports worth US$50 billion in July,  prompting Beijing to respond in kind.  Despite a temporary truce agreed at the  G20 summit on 1 December 2017, trade  tensions between the two nations  remains high.   Emerging market equities decline  rapidly in August as tightening financial  conditions impact economies with  external funding vulnerabilities. Q4   In November, Jackson announces the  acquisition of the group payout annuity  business of John Hancock Life Insurance  Company, a closed book of circa 200,000  in-force certificates representing IFRS  reserves of approximately US$5.5bn.     PPM America (PPMA) becomes the  fourth Prudential signatory to the UN  Principles for Responsible Investment in  October 2018.   The IAIS launches a consultation for  the Holistic Framework (HF) in  November, which aims to assess and  mitigate systemic risk in the insurance  sector and is intended to replace the  current Global Systemically Important  Insurer (G-SII) measures, with the aim of  adoption in November 2019.    The reduction in global  accommodative monetary policy  continues, with the European Central  Bank (ECB) confirming that net asset  purchases would cease at the end of  2018, and the US Federal reserve raises  rates for the fourth time in 2018  in December.   In November the International  Accounting Standards Board (IASB)  tentatively delays the effective date of  IFRS 17 by one year to periods beginning  on or after 1 January 2022. The  introduction of further amendments to  this new standard will be considered.   Democrats win control of the House of    In December, the UK Parliament  Representatives in the November US  midterm elections, while the Republicans  retain control of the Senate. As bipartisan  disputes increase, the US government  partially shuts down between late  December 2018 and January 2019. rejects the negotiated agreement on the  UK’s withdrawal from the EU.  Uncertainty on the nature of the UK’s exit  from the EU persists as the UK  government seeks to renegotiate the  agreement in early 2019.   China reports a large manufacturing  decline in December, prompting  concerns of a global growth slowdown.  Additional stimulus measures from the  People’s Bank of China are enacted.   Fears of tightening financial conditions  and a global economic slowdown trigger  a sharp sell-off in US equity markets,  which had remained resilient through the  first three quarters of 2018, while global  equities fall further. The S&P500 ends  2018 with an annual decline of circa  6 per cent. In early 2019 risk sentiment  improves, contributing to a broad rally in  equity markets. Key   Prudential   Regulatory   (Geo)political   Markets/economies www.prudential.co.uk  Annual Report 2018  Prudential plc  53 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationGroup Chief Risk Officer’s report of the risks facing our business and how these are managed continued 3. Managing the risks in implementing our strategy This section provides an overview of the Group’s strategy, the significant risks arising from the delivery of this strategy and the risk  management focus for the following 12 months. The risks outlined below, which are not exhaustive, are discussed in more detail in  sections 5 and 6. Our strategy Asia Significant risks arising from the delivery of the strategy Persistency risk Serving the protection and  investment needs of the  growing middle class in Asia Morbidity risk Risk management focus for the next 12 months Implementation of business initiatives to manage persistency  risk, including review of distribution channels and incentive  structures. Ongoing experience monitoring. Implementation of business initiatives to manage morbidity  risk, including product repricing where required. Ongoing  experience monitoring. Regulatory risk, including  foreign ownership Proactive engagement with national governments and  regulators. United States Financial risks Maintaining, and enhancing where necessary, appropriate risk  limits, hedging strategies and Group oversight that are in place. Providing asset accumulation  and retirement income  products to US baby boomers Policyholder behaviour risk Continued monitoring of policyholder behaviour experience  and review of assumptions. Africa The Group will continue to increase its risk management focus on Prudential Africa as the business  there grows in materiality. UK and Europe Meeting the savings and  retirement needs of an  ageing UK and continental  European population Group-wide We aim to generate attractive  returns enabling us to  provide financial security to  our customers and deliver  sustainable growth for our  shareholders. Following  rigorous review, we believe  that this long-term strategy  is best served through the  demerger of  M&GPrudential. M&GPrudential merger and  transformation risk Managing the merger and transformation risks to the delivery  of strategic, financial and operational objectives. Longevity risk Customer risk Transformation risks around  key change programmes Group-wide regulatory risks Continued oversight and experience analysis. Ongoing monitoring of embedded customer outcome indicators. Managing the customer risk implications from: merger and  transformation activity; new product propositions and new  regulatory requirements. Managing the inter-connected execution risks from this  transformation activity under the Group’s transformation  risk framework, as well as providing other risk management  support and review. Ensuring both M&GPrudential and Prudential plc will have  in place two strong standalone risk functions after demerger. Engagement with regulators and industry groups on macro- prudential and systemic risk-related regulatory initiatives,  international capital standards, and other initiatives with  Group-wide impacts. Engagement with the Hong Kong Insurance Authority on  the Group-wide supervisory framework that will apply to  the Group after the demerger of M&GPrudential. Information security and   data privacy risks Continuing the implementation of the Group’s information  security risk management strategy and defence plan. Ensuring full compliance with applicable privacy laws  across the Group. 54  Prudential plc  Annual Report 2018  www.prudential.co.uk           In 2018, the Group continued to update  its policies and processes around new  product approvals, management of critical  third-party arrangements and oversight  of model risks. A transformation risk  framework is being applied directly  to manage programme delivery risks.  Prudential manages key ESG issues through  a multi-disciplinary approach with first-line  functional ownership for ESG topics. The following section provides more detail  on our risk governance, risk culture and risk  management process. 4. Risk governance a. System of governance Appropriately managed risks allow  Prudential to take business opportunities  and enable the growth of its business.  Effective risk management is therefore  fundamental in the execution of the  Group’s business strategy. Prudential’s  approach to risk management must be both  well embedded and rigorous, and, as the  economic and political environment in  which we operate changes, it should also  be sufficiently broad and dynamic to  respond to these changes. Prudential has in place a system of  governance that promotes and embeds a  clear ownership of risk, processes that link  risk management to business objectives,  a proactive Board and senior management  providing oversight of risks, mechanisms  and methodologies to review, discuss and  communicate risks, and risk policies and  standards to ensure risks are identified,  measured, managed, monitored and  reported.  How ‘risk’ is defined Prudential defines ‘risk’ as the uncertainty  that is faced in implementing the Group’s  strategies and achieving its objectives  successfully, and includes all internal or  external events, acts or omissions that have  the potential to threaten the success and  survival of the Group. Accordingly, material  risks will be retained selectively when it is  considered that there is value in doing so,  and where it is consistent with the Group’s  risk appetite and philosophy towards  risk-taking.  How risk is managed Risk management is embedded across the  Group through the Group Risk Framework,  which details Prudential’s risk governance,  risk management processes and risk appetite.  The Framework has been developed to  monitor the risks to our business and is  owned by the Board. The aggregate Group  exposure to its key risk drivers is monitored  and managed by the Group Risk function  which is responsible for reviewing,  assessing, providing oversight and reporting  on the Group’s risk exposure and solvency  position from the Group economic,  regulatory and ratings perspectives. Risk management Identified major risk categories n Risk measure m e Risk identific a ti o Risk governance and culture n t a n d a s s e s s m e n t Business strategy Capital management Stress and scenario testing M o n i t o r a n d re p ort n M a a g e and control ‘ M a cro’ risks i o n s t a r e p G e o Strategic and transformation risk Market risk conomic conditio n s ur business o al e b lo G m o o r f s k s i R Operational risk Group risk profile T e c h n o l o g i c Insurance risk R i s k s f r o Liquidity risk Conduct risk m o a l c h a r g e ur business produ c t s p o li t i c R i s k s a l r i s k s Credit risk f r o m o u r i n v e s t m e n t s k Regulatory ris ESG risk s www.prudential.co.uk  Annual Report 2018  Prudential plc  55 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information b. Group Risk Framework i. Risk governance and culture Prudential’s risk governance comprises the  Board, organisational structures, reporting  relationships, delegation of authority, roles  and responsibilities, and risk policies that  the Group Head Office and the business  units establish to make decisions and  control their activities on risk-related  matters. It includes individuals, Group- wide functions and committees involved  in overseeing and managing risk. The risk governance structure is led by  the Group Risk Committee, supported  by independent non-executives on risk  committees of Material Subsidiaries. These  committees monitor the development of  the Group Risk Framework, which includes  risk appetite, limits, and policies, as well  as risk culture. The Group Risk Committee reviews the  Group Risk Framework and recommends  changes to the Board to ensure that it  remains effective in identifying and  managing the risks faced by the Group.  A number of core risk policies and  standards support the Framework to ensure  that risks to the Group are identified,  assessed, managed and reported. Culture is a strategic priority of the Board,  who recognise its importance in the way that  the Group does business. Risk culture is a  subset of Prudential’s broader organisational  culture, which shapes the organisation-wide  values that we use to prioritise risk  management behaviours and practices. An evaluation of risk culture forms part of  the Group Risk Framework and in particular  seeks to identify evidence that:  — Senior management in business units  articulate the need for effective risk  management as a way to realise  long-term value and continuously  support this through their actions;  — Employees understand and care about  their role in managing risk – they are  aware of and discuss risk openly as part  of the way they perform their role; and  — Employees invite open discussion on the  approach to the management of risk. The Group Risk Committee also has a key  role in providing advice to the  Remuneration Committee on risk  management considerations to be applied  in respect of executive remuneration. Prudential’s Code of Conduct and Group  Governance Manual include a series of  guiding principles that govern the  day-to-day conduct of all its people and  any organisations acting on its behalf. This  is supported by specific risk policies which  require that the Group act in a responsible  manner. This includes, but is not limited to,  policies on anti-money laundering, financial  crime and anti-bribery and corruption. The  Group’s third-party supply policy ensures  that human rights and modern slavery  considerations are embedded across all of  its supplier and supply chain arrangements.  Embedded procedures to allow individuals  to speak out safely and anonymously  against unethical behaviour and conduct  are also in place. ii. The risk management cycle The risk management cycle comprises  processes to identify, measure and assess,  manage and control, and monitor and  report on our risks. Risk identification Group-wide risk identification takes place  throughout the year as the Group’s  businesses undertake a comprehensive  bottom-up process to identify, assess and  document its risks. This concludes with an  annual top-down identification of the  Group’s key risks, which considers those  risks that have the greatest potential to  impact the Group’s operating results and  financial condition and is used to inform  risk reporting to the risk committees and  the Board for the year.  Our risk identification process also includes  the Group’s Own Risk and Solvency  Assessment (ORSA), as required under  Solvency II, and horizon-scanning  performed as part of our emerging risk  management process.  In accordance with provision C.2.1 of the  UK Code, the Directors perform a robust  assessment of the principal risks facing the  Company through the Group-wide risk  identification process, Group ORSA report  and the risk assessments undertaken as part  of the business planning review, including  how they are managed and mitigated.  Reverse stress testing, which requires the  Group to ascertain the point of business  model failure, is another tool that helps us  to identify the key risks and scenarios that  may have a material impact on the Group. The risk profile is a key output from the  risk identification and risk measurement  processes, and is used as a basis for  setting Group-wide limits, management  information, assessment of solvency  needs, and determining appropriate stress  and scenario testing. The Group’s annual  set of key risks are given enhanced  management and reporting focus. Risk measurement and assessment All identified risks are assessed based on  an appropriate methodology for that risk.  All quantifiable risks, which are material  and mitigated by holding capital, are  modelled in the Group’s internal model,  which is used to determine capital  requirements under Solvency II and our  own economic capital basis. Governance  arrangements are in place to support the  internal model, including independent  validation and processes and controls  around model changes and limitations. Risk management and control The control procedures and systems  established within the Group are designed  to manage the risk of failing to meet  business objectives and are detailed in  the Group risk policies. These focus on  aligning the levels of risk-taking with the  achievement of business objectives and  can only provide reasonable, and not  absolute assurance, against material  misstatement or loss. The management and control of risks are  set out in the Group risk policies, and form  part of the holistic risk management  approach under the Group’s ORSA.  These risk policies define:  — The Group’s risk appetite in respect of  material risks, and the framework under  which the Group’s exposure to those  risks is limited;  — The processes to enable Group senior  management to effect the measurement  and management of the Group material  risk profile in a consistent and coherent  way; and  — The flows of management information  required to support the measurement  and management of the Group’s  material risks and to meet the needs  of external stakeholders. The methods and risk management tools  we employ to mitigate each of our major  categories of risks are detailed in the  further risk information section below. Risk monitoring and reporting The identification of the Group’s key risks  informs the management information  received by the Group risk committees and  the Board. Risk reporting of key exposures  against appetite is also included, as well as  ongoing developments in other key and  emerging risks. iii. Risk appetite, limits and triggers The extent to which Prudential is willing  to take risk in the pursuit of its business  strategy and objective to create  56  Prudential plc  Annual Report 2018  www.prudential.co.uk Group Chief Risk Officer’s report of the risks facing our business and how these are managed continuedshareholder value is defined by a number  of qualitative and quantitative expressions  of risk appetite, operationalised through  measures such as limits, triggers and  indicators. The Group Risk function is  responsible for reviewing the scope and  operation of these risk appetite measures  at least annually to determine that they  remain relevant. The Board approves all  changes made to the Group’s aggregate  risk appetite, and has delegated authority  to the Group Risk Committee to approve  changes to the system of limits, triggers  and indicators.  Group risk appetite is set with reference to  economic and regulatory capital, liquidity  and earnings volatility which is aimed at  ensuring that an appropriate level of  aggregate risk is taken. Appetite is also  defined for the Group’s financial and  non-financial risks. Further detail is  included in sections 5 and 6, as well as  covering risks to shareholders, including  those from participating and third-party  business. Group limits operate within these  expressions of risk appetite to constrain  material risks, while triggers and indicators  provide further constraint and defined  points for escalation. Capital requirements: Limits on capital requirements aim to ensure  that the Group meets its internal economic  capital requirements, achieves its desired  target rating to meet its business objectives,  and ensures that supervisory intervention  is not required. The two measures used at  the Group level are Solvency II capital  requirements and internal economic capital  (ECap) requirements. In addition, capital  requirements are monitored on local  statutory bases. The Group Risk Committee is responsible  for reviewing the risks inherent in the  Group’s business plan and for providing the  Board with input on the risk/reward  trade-offs implicit therein. This review is  supported by the Group Risk function,  which uses submissions from our local  business units to calculate the Group’s  aggregated position (allowing for  diversification effects between local  business units) relative to the aggregate  risk limits.  Risk management Risk identification Risk identification covers Group-wide:  —  Top down risk identification  —  Bottom up risk identification  —  Emerging risk identification. Risk measurement and assessment Risks are assessed in terms of materiality.  Material risks which are modelled are  included in appropriately validated  regulatory and economic capital models. Manage and control Risk appetite and limits allow for the  controlled growth of our business, in  line with business strategy and plan. Processes that support the oversight  and control of risks include:  — The Own Risk and Solvency  Assessment (ORSA)  — Group approved limits and early  warning triggers  — Large risk approval process  — Global counterparty limit framework  — Financial incidents procedures. Monitor and report Escalation requirements in the event of a  breach are clearly defined. Risk reporting  provides regular updates to the Group’s  Board and risk committees on exposures  against Board-approved risk appetite  statements and limits. Reporting also  covers the Group’s key risks. n Risk measure m e Risk identific a ti o Risk governance and culture n t a n d a s s e s s m e n t Business strategy Capital management Stress and scenario testing M o n i t o r a n d re p ort n M a a g e and control Risk governance and culture Risk governance comprises the Board,  organisational structures, reporting  relationships, delegation of authority,  roles and responsibilities, and risk  policies. Risk culture is a subset of  broader organisational culture, and  shapes the organisation-wide values used  to prioritise risk management behaviours. Capital management Capital adequacy is monitored to ensure  that internal and regulatory capital  requirements are met, and that solvency  buffers are appropriate, over the business  planning horizon and under stress. Business strategy Business strategy and the business  plan provide direction on future  growth and inform the level of limits  on solvency, liquidity and earnings  and for our key risks. The Group Risk  function provide input and opinion on  key aspects of business strategy. Stress and scenario testing Stress and scenario testing is  performed to assess the robustness of  capital adequacy and liquidity, and the  appropriateness of risk limits. Recovery  planning assesses the effectiveness of  the Group’s recovery measures and the  appropriateness of activation points. www.prudential.co.uk  Annual Report 2018  Prudential plc  57 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Liquidity: The objective of the Group’s liquidity risk  appetite is to ensure that the Group is able  to generate sufficient cash resources to  meet financial obligations as they fall due  in business-as-usual and stressed  scenarios. Risk appetite with respect to  liquidity risk is measured using a Liquidity  Coverage Ratio (LCR) which considers  the sources of liquidity against liquidity  requirements under stress scenarios.  Earnings volatility: The objectives of the Group’s appetite and  aggregate risk limits on earnings volatility  seek to ensure that variability is consistent  with the expectations of stakeholders; that  the Group has adequate earnings (and  cash flows) to service debt and expected  dividends and to withstand unexpected  shocks; and that earnings (and cash flows)  are managed properly across geographies  and are consistent with funding strategies.  The volatility of earnings is measured and  monitored on operating profit and EEV  operating profit bases, although IFRS  and EEV total profits are also considered. 5. Summary risks Broadly, the risks assumed across the  Group can be categorised as those which  arise as a result of our business operations,  our investments and those arising from the  nature of our products. Prudential is also  exposed to those broad risks which apply  because of the global environment in  which it operates. These risks, where they  materialise, may have a financial impact on  the Group, and could also impact on the  performance of its products or the services  it provides to our customers and  distributors, which gives rise to potential  risks to its brand and reputation and have  conduct risk implications. These risks are  summarised below. The materiality of  these risks, whether material at the level  of the Group or its business units, is also  indicated. The Group’s disclosures  covering risk factors can be found at the  end of this document. ‘Macro’ risks Some of the risks that the Group is exposed to are necessarily broad given the external influences which may impact on the business.  These risks include: Global economic conditions Changes in global economic conditions can impact Prudential directly; for example, by leading to poor investment returns and  fund performance, and increasing the cost of promises (guarantees) that have been made to our customers. Changes in economic  conditions can also have an indirect impact on the Group; for example, leading to a decrease in the propensity for people to save  and buy Prudential’s products, as well as changing prevailing political attitudes towards regulation. This is a risk which is considered  material at the level of the Group.  Geopolitical risk The geopolitical environment may have direct or indirect impacts on the Group, and has seen varying levels of volatility in recent  years as seen by political developments in the UK, the US and the Eurozone. Uncertainty in these regions, combined with continuing  conflict in the Middle East and elevated tensions in East Asia and the Korean peninsula underline that geopolitical risks have  potentially global and wide-ranging impacts; for example, through increased regulatory and operational risks, and changes to the  economic environment.  Regulatory risk Prudential operates under the ever-evolving requirements set out by diverse regulatory, legal and tax regimes. The increasing  shift towards macro-prudential regulation and the number of regulatory changes under way across Asia (in particular focusing on  consumer protection) are key areas of focus, while both Jackson and M&GPrudential operate in highly regulated markets. Regulatory  reforms can have a material impact on Prudential’s businesses. The proposed demerger of M&GPrudential will result in a change in  Prudential’s Group-wide supervisor to the Hong Kong Insurance Authority. The Group is, led by the Group Chief Risk Officer,  proactively engaging with the supervisor-elect on the supervisory framework that will apply to the Group after the demerger. Technological change The emergence of advanced technologies such as artificial intelligence and blockchain is providing an impetus for companies to  rethink their existing operating models and how they interact with their customers. Technological change is considered from both  an external and internal view. The external view considers the rise of new technologies and how this may impact on the insurance  industry and Prudential’s competitiveness within it, while the internal view considers the risks associated with the Group’s internal  developments in meeting digital change challenges and opportunities. Prudential is embracing the opportunities from new  technologies, and any risks which arise from them are closely monitored. ESG risks As a Group, responding effectively to those material risks with ESG implications is crucial in maintaining Prudential’s brand and  reputation, and in turn its financial performance and its long-term strategy. Further information on the Group’s approach to  governance on ESG issues and the relevant Group-wide policies for managing these are included in the Corporate responsibility  review on pages 71 to 74. 58  Prudential plc  Annual Report 2018  www.prudential.co.uk Group Chief Risk Officer’s report of the risks facing our business and how these are managed continuedRisks from our investments Risks from our products Risks from our business operations Market risk Is the potential for reduced value of  Prudential’s investments resulting from  the volatility of asset prices, driven by  fluctuations in equity prices, interest  rates, foreign exchange rates and  property prices.  In the Asia business, the main market  risks arise from the value of fees from  its fee-earning products. In the US,  Jackson’s fixed and variable annuity  books are exposed to a variety of  market risks due to the assets backing  these policies.  The UK business’ market risk  exposure arises from the valuation  of the shareholder’s proportion of  the with-profits fund’s future profits,  which depends on equity, property  and bond values. M&GPrudential invests in a broad range  of asset classes and its income is subject  to the price volatility of global financial  and currency markets. Credit risk Is the potential for reduced value of  Prudential’s investments driven by the  market’s perceptions for potential for  defaults of investment and other  counterparties.  The Group’s asset portfolio also gives  rise to invested credit risk. The assets  backing the UK and Jackson annuity  businesses means credit risk is  considered a material risk for these  business units in particular. Liquidity risk Is the risk of not having sufficient liquid  assets to meet obligations as they fall  due, and we look at this under both  normal and stressed conditions. This  is a risk which is considered material  at the level of the Group. Insurance risks The nature of the products offered by  Prudential exposes it to insurance risks,  which form a significant part of the  overall Group risk profile.  The insurance risks that the business  is exposed to by virtue of its products  include longevity risk (policyholders  living longer than expected); mortality risk (higher number of policyholders  with life protection dying than  expected); morbidity risk (more  policyholders with health protection  becoming ill than expected) and  persistency risk (more customers  lapsing their policies than expected,  and a type of policyholder behaviour  risk). The medical insurance business  in Asia is also exposed to medical inflation risk (the increasing cost  of medical treatments being higher  than expected). The pricing of Prudential’s products  requires it to make a number of  assumptions, and deviations from these  may impact its reported profitability and  capital position. Across its business  units, some insurance risks are more  material than others.  Persistency and morbidity risks are  among the most material insurance risks  for the Asia business given the focus on  health and protection products in the  region.  For M&GPrudential the most material  insurance risk is longevity risk, arising  from its legacy annuity business.  The Jackson business is most exposed  to policyholder behaviour risk, including  persistency, which impacts the  profitability of the variable annuity  business and is influenced by market  performance and the value of policy  guarantees. Conduct risk The design and distribution of  Prudential’s products is crucial in  ensuring that the Group’s commitment  to meeting customers’ needs and  expectations are met, and are factors  which the Group considers as part of  its overall conduct of business. Strategic and transformation risks A number of significant change  programmes are currently running to  effect both the Group’s strategy and to  comply with emerging regulatory changes.  The breadth of these activities, and the  consequences, including the reputational  impact, to the Group should they fail to  meet their objectives, mean that these  risks are material at the level of the Group. Operational risks A combination of the complexity of the  Group, its activities and the extent of  transformation in progress creates a  challenging operating environment.  Operational risk is the risk of loss or  unintended gain from inadequate or  failed processes, personnel, systems  and external events, and can arise through  business transformation; introducing new  products; new technologies; and entering  into new markets and geographies.  Implementing the business strategy and  processes for ensuring regulatory  compliance (including those relating to  the conduct of its business) requires  interconnected change initiatives across  the Group, the pace of which introduces  further complexity. The Group’s  outsourcing and third party relationships  introduce their own distinct risks. Such  operational risks, if they materialise, could  result in financial loss and/or reputational  damage. Operational risk is considered  to be material at the level of the Group.  Business disruption risks may impact on  Prudential’s ability to meet its key  objectives and protect its brand and  reputation. The Group’s business  resilience is a core part of a well- embedded business continuity  management programme. Information security and data privacy  risks are significant considerations for  Prudential and the cyber security threat  continues to evolve globally in  sophistication and potential significance  This includes the continually evolving risk  of malicious attack on its systems, network  disruption as well as risks relating to data  security, integrity, privacy and misuse.  The scale of the Group’s IT infrastructure  and network, stakeholder expectations  and high profile cyber security and data  misuse incidents across industries means  that these risks continue to be considered  material at the level of the Group. www.prudential.co.uk  Annual Report 2018  Prudential plc  59 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 6. Further risk information In reading the sections below, it is useful  to understand that there are some risks  that Prudential’s policyholders assume  by virtue of the nature of their products,  and some risks that the Company and its  shareholders assume. Examples of the  latter include those risks arising from assets  held directly by and for the Company or the  risk that policyholder funds are exhausted.  This report is focused mainly on risks to the  shareholder but will include those which  arise indirectly through our policyholder  exposures. 6.1 ‘Macro’ risks a. Global regulatory and political risks Regulatory and political risks may impact  on Prudential’s business or the way in  which it is conducted. This covers a broad  range of risks including changes in  government policy and legislation, capital  control measures, new regulations at either  national or international level, and specific  regulator interventions or actions.  Following the announcement in August  2018 that the Hong Kong Insurance  Authority would become Prudential’s  Group-wide supervisor after the demerger  of M&GPrudential, constructive  engagement with the supervisor-elect  began in 2018 and will continue into 2019.  In particular, Prudential continues to  engage with the supervisor on its proposed  Group-wide supervision framework which  will apply to the Group after the demerger. Recent shifts in the focus of some  governments toward more protectionist  or restrictive economic and trade policies  could impact on the degree and nature  of regulatory changes and Prudential’s  competitive position in some geographic  markets. This could take effect, for  example, through increased friction in  cross-border trade, capital controls or  measures favouring local enterprises  such as changes to the maximum level  of non-domestic ownership by foreign  companies. These developments continue  to be monitored by the Group at a national  and global level and these considerations  form part of the Group’s ongoing  engagement with government policy  teams and regulators. Efforts to curb systemic risk and promote  financial stability are also underway. At the  international level, the Financial Stability  Board (FSB) continues to develop  recommendations for the asset  management and insurance sectors,  including on-going assessment of systemic  risk measures. The International  Association of Insurance Supervisors (IAIS)  has continued its focus on the following  two key developments. Prudential’s designation as a G-SII was last  reaffirmed on 21 November 2016. The  FSB, in conjunction with the IAIS, did not  publish a new list of G-SIIs in 2017 and did  not engage in G-SII identification for 2018  following IAIS’ launch of the consultation  on the Holistic Framework (HF) on  14 November 2018, which aims to assess  and mitigate systemic risk in the insurance  sector and is intended to replace the  current G-SII measures. The IAIS intends  to implement the HF in 2020 and it is  proposed that G-SII identification be  suspended from that year. In the interim,  the relevant group-wide supervisors have  committed to continue applying existing  enhanced G-SII supervisory policy  measures with some supervisory  discretion, which includes a requirement to  submit enhanced risk management plans.  In November 2022, the FSB will review the  need to either discontinue or re-establish  an annual identification of G-SIIs in  consultation with the IAIS and national  authorities. The Higher Loss Absorbency  (HLA) standard (a proposed additional  capital measure for G-SII designated firms,  planned to apply from 2022) is not part of  the proposed HF. However, the HF  proposes more supervisory powers of  intervention for mitigating systemic risk,  including temporary financial  reinforcement measures such as capital  add-ons and suspension of dividends.  The IAIS is also developing the ICS as part  of ComFrame – the Common Framework  for the supervision of Internationally Active  Insurance Groups (IAIGs). The  implementation of ICS will be conducted in  two phases – a five-year monitoring phase  followed by an implementation phase.  ComFrame will more generally establish  a set of common principles and standards  designed to assist supervisors in  addressing risks that arise from insurance  groups with operations in multiple  jurisdictions. The ComFrame proposals,  including ICS, could result in enhanced  capital and regulatory measures for IAIGs,  for which Prudential satisfies the criteria. In certain jurisdictions in which Prudential  operates there are also a number of  ongoing policy initiatives and regulatory  developments that are having, and will  continue to have, an impact on the way  Prudential is supervised, including the  US Dodd-Frank Wall Street Reform and  Consumer Protection Act, addressing  Financial Conduct Authority (FCA) reviews  and ongoing engagement with the  Prudential Regulation Authority (PRA).  Decisions taken by regulators, including  those related to solvency requirements,  corporate or governance structures, capital  allocation and risk management may have  an impact on our business.  There has, in recent years, been regulatory  focus in the UK on insurance products and  market practices which may have adversely  impacted customers, including the FCA’s  Legacy Review and Thematic Review of  Annuity Sales Practices. The management  of customer risk remains a key focus  of management in the UK business.  Merger and transformation activity at  M&GPrudential, new product propositions  and new regulatory requirements may also  have customer risk implications which are  monitored. In May 2017, the International Accounting  Standards Board (IASB) published IFRS 17  which will introduce fundamental changes  to the IFRS-based reporting of insurance  entities that prepare accounts according  to IFRS from 2021. In November 2018,  the IASB tentatively agreed to delay the  effective date of IFRS 17 by one year to  periods beginning on or after 1 January  2022 and is considering introducing further  amendments to this new standard.  IFRS 17 is expected to, among other things,  include altering the timing of IFRS profit  recognition, and the implementation of the  standard is likely to require changes to the  Group’s IT, actuarial and finance systems.  The Group is reviewing the complex  requirements of this standard and  considering its potential impact. In March 2018, the UK and EU agreed the  terms of a transition agreement for the UK’s  exit from the bloc, which will last from the  termination of the UK’s membership of the  EU (at 11.00pm GMT 29 March 2019) until  31 December 2020 (although a legally  binding text is yet to be agreed). The  outcome of negotiations on the final terms  of the UK’s relationship with the EU  remains highly uncertain. In particular,  depending on the nature of the UK’s exit  from the EU, the following effects may be  seen. The UK and EU may experience a  downturn in economic activity, which is  expected to be more pronounced for the  UK, particularly in the event of a disorderly  exit by the UK from the EU. Market  volatility and illiquidity may increase in the  period leading up to, and following, the  UK’s withdrawal, and property values  (including the liquidity of property funds,  where redemption restrictions may be  applied) and interest rates may be  impacted. In particular, downgrades in  60  Prudential plc  Annual Report 2018  www.prudential.co.uk Group Chief Risk Officer’s report of the risks facing our business and how these are managed continuedsovereign and corporate debt ratings may  occur. In a severe scenario where the UK’s  sovereign rating is downgraded by more  than one notch, this may also impact on the  credit ratings of UK companies, including  M&GPrudential’s UK business. The legal  and regulatory regime in which the Group  (and, in particular, M&GPrudential)  operates, may also be affected (including  the future applicability of the Solvency II  regime in the UK), the extent of which  remains uncertain. There is also a risk of  operational disruption to the business, in  particular to M&GPrudential.  The Group’s diversification by geography,  currency, product and distribution should  reduce some of the potential impact of the  UK’s exit. M&GPrudential, due to the  geographical location of both its  businesses and its customers, has the  most potential to be affected. As a result  of the uncertainty on the nature of the  arrangements that will be put in  place between the UK and the EU,  M&GPrudential has completed the  implementation of a range of plans  including transfers of business to EU  jurisdictions, balance sheet and with- profits fund hedging protection and  operational measures (including customer  communications) that are designed to  mitigate the potential adverse impacts to  the Group’s UK business. In addition, the  business has sought to ensure, through  various risk mitigation actions, that it is  appropriately prepared for the potential  operational and financial impacts of a  no-deal withdrawal.  In the US, various initiatives are underway  to introduce fiduciary obligations for  distributors of investment products, which  may reshape the distribution of retirement  products. Jackson has introduced  fee-based variable annuity products  in response to the potential introduction  of such rules, and we anticipate that the  business’s strong relationships with  distributors, history of product innovation  and efficient operations should further  mitigate any impacts.  In late 2018, the US NAIC concluded  an industry consultation with the aim of  reducing the non-economic volatility in the  variable annuity statutory balance sheet  and enhancing risk management. The  NAIC is targeting a January 2020 effective  date for the new framework, which will  have an impact on Jackson’s business.  Jackson continues to assess and test the  changes. The NAIC also has an on-going  review of the C-1 bond factors in the  required capital calculation, on which  further information is expected to be  provided in due course. The Group’s  preparations to manage the impact of these  reforms will continue. In the EU, the European Commission began  a review in late 2016 of some aspects of the  Solvency II legislative package, which is  expected to continue until 2021 and  includes a review of the Long Term  Guarantee measures. On 27 July 2017, the UK FCA announced  that it will no longer persuade, or use its  powers to compel, panel banks to submit  rates for the calculation of LIBOR after  2021. The discontinuation of LIBOR in its  current form and its replacement with the  Sterling Overnight Index Average  benchmark (SONIA) in the UK (and other  alternative benchmark rates in other  countries) could, among other things,  impact the Group through an adverse  effect on the value of Prudential’s assets  and liabilities which are linked to, or which  reference LIBOR, a reduction in market  liquidity during any period of transition and  increased legal and conduct risks to the  Group arising from changes required to  documentation and its related obligations  to its stakeholders.  In Asia, regulatory regimes are developing  at different speeds, driven by a  combination of global factors and local  considerations. New local capital rules and  requirements could be introduced in these  and other regulatory regimes that  challenge legal or ownership structures,  current sales practices, or could be applied  to sales made prior to their introduction  retrospectively, which could have a  negative impact on Prudential’s business  or reported results. Risk management and mitigation of  regulatory and political risk at Prudential  includes the following:  — Risk assessment of the Business Plan  which includes consideration of current  strategies;  — Close monitoring and assessment  of our business environment and  strategic risks;  — The consideration of risk themes  in strategic decisions; and  — Ongoing engagement with national  regulators, government policy teams  and international standard setters. b. ESG risks including climate change The business environment in which  Prudential operates is continually  changing, and responding effectively to  those material risks with ESG implications  is crucial in maintaining Prudential’s brand  and reputation, and in turn its financial  performance and its long-term strategy.  The Group maintains active engagement  with its key stakeholders, including  investors, customers, employees,  governments, policymakers and  regulators in its key markets, as well as  with international institutions – all of  whom have expectations, which the  Group must balance, as it responds to  ESG-related matters. Climate change is a key ESG theme which  continues to move up the agenda of many  regulators, governments, non- governmental organisations and investors.  An overview of the various regulatory,  supervisory and investor-driven initiatives  related to climate change currently in  progress; how the Group manages climate  change risks and opportunities; and the  Group’s participation in industry initiatives  in this area is outlined in the Corporate  responsibility review on page 74. There has  been increased regulatory and supervisory  focus on sustainable finance and  responsible investment. The Group  recognises this and the ESG Executive  Committee seeks, as one of its aims, to  ensure a consistent approach in managing  ESG considerations in its business  activities, including investment activities. The Group’s operational risk framework  explicitly incorporates ESG as a component  of its social and environmental  responsibility, brand management and  external communications. This is further  strengthened by factoring considerations  for reputational impacts when the  materiality of operational risks are  assessed. Policies and procedures to  support how the Group operates in relation  to certain ESG issues are covered in the  Group Governance Manual. Prudential  manages key ESG issues though a  multi-disciplinary approach with first line  functional ownership for ESG topics.  Further information on the Group’s  approach to governance on ESG issues  and the relevant Group-wide policies  for managing these are included in  the Corporate responsibility review  on page 74. www.prudential.co.uk  Annual Report 2018  Prudential plc  61 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information6.2 Risks from our investments a. Market risk The main drivers of market risk in the  Group are:  — Investment risk, which arises on  our holdings of equity and property  investments, the prices of which  can change depending on market  conditions;  — Interest rate risk, which is driven by  the valuation of Prudential’s assets  (particularly the bonds that it invests in)  and liabilities, which are dependent on  market interest rates and exposes it to  the risk of those moving in a way that is  detrimental; and  — Foreign exchange risk, through  translation of its profits and assets  and liabilities denominated in various  currencies, given the geographical  diversity of the business. The main investment risk exposure arises  from the portion of the profits from the UK  and Hong Kong with-profits funds which  the shareholders are entitled to receive;  the value of the future fees from the  fee-earning products in the Asia business;  and from the asset returns backing  Jackson’s variable annuities business.  Further detail is provided below.  The Group’s interest rate risk is driven by  the need to match the duration of its assets  and liabilities in the UK and Europe  insurance business and the fixed annuity  business in Jackson. Interest rate risk also  arises from the guarantees of some non  unit-linked investment products in Asia;  and the cost of guarantees in Jackson’s  fixed index and variable annuity business.  Further detail is provided below. The Group has appetite for market risk  where it arises from profit-generating  insurance activities to the extent that it  remains part of a balanced portfolio of  sources of income for shareholders and is  compatible with a robust solvency position. The Group’s market risks are managed  and mitigated by the following:  — Our market risk policy;  — Risk appetite statements, limits and  triggers;  — Our asset and liability management  programmes;  — Hedging derivatives, including equity  options and futures, interest rate swaps  and swaptions and currency forwards;  — The monitoring and oversight of market  risks through the regular reporting of  management information; and  — Regular deep dive assessments. Equity and property investment risk (Audited) In the UK and Europe business, the main  investment risk arises from the assets  held in the with-profits funds through the  shareholders’ proportion of the funds’  declared bonuses and policyholder net  investment gains (future transfers). This  investment risk is driven mainly by equities  in the funds and some hedging to protect  against a reduction in the value of these  future transfers is performed outside  the funds. The UK with-profits funds’  Solvency II own funds, estimated at  £9.7 billion as at 31 December 2018, helps  to protect against market fluctuations and  is protected partially against falls in equity  markets through an active hedging  programme within the fund.  In Asia, the shareholder exposure to equity  price movements results from unit-linked  products, where fee income is linked  to the market value of the funds under  management. Further exposure arises from  with-profits businesses where bonuses  declared are based broadly on historical  and current rates of return from the Asia  business’ investment portfolios, which  include equities. In Jackson, investment risk arises from the  assets backing customer policies. Equity  risk is driven by the variable annuity  business, where the assets are invested in  both equities and bonds and the main risk  to the shareholder comes from providing  the guaranteed benefits offered. The  exposure to this is primarily controlled by  using a derivative hedging programme, as  well as through the use of reinsurance to  pass on the risk to third-party reinsurers. While accepting the equity exposure that  arises on future fees, the Group has limited  appetite for exposures to equity price  movements to remain unhedged or for  volatility within policyholder guarantees  after taking into account any natural offsets  and buffers within the business. Interest rate risk (Audited) Some products that Prudential offer are  sensitive to movements in interest rates.  As part of the Group’s ongoing  management of this risk, a number of  mitigating actions to the in-force business  have been taken, as well as repricing and  restructuring new business offerings in  response to recent relatively low interest  rates. Nevertheless, some sensitivity to  interest rate movements is still retained. The Group’s appetite for interest rate risk  is limited to where assets and liabilities  can be tightly matched and where liquid  assets or derivatives exist to cover interest  rate exposures. In the UK and Europe insurance business,  interest rate risk arises from the need to  match the cash flows of its annuity  obligations with those from its investments.  The risk is managed by matching asset and  liability durations as well as continually  assessing the need for use of any  derivatives. Under Solvency II rules,  interest rate risk also results from the  requirement to include a balance sheet risk  margin. The with-profits business is also  exposed to interest rate risk through some  product guarantees. Such risk is largely  borne by the with-profits fund itself  although shareholder support may be  required in extreme circumstances where  the fund has insufficient resources to  support the risk. 62  Prudential plc  Annual Report 2018  www.prudential.co.uk Group Chief Risk Officer’s report of the risks facing our business and how these are managed continuedb. Credit risk Prudential invests in bonds that provide a  regular, fixed amount of interest income  (fixed income assets) in order to match the  payments needed to policyholders. It also  enters into reinsurance and derivative  contracts with third parties to mitigate  various types of risk, as well as holding  cash deposits at certain banks. As a result,  it is exposed to credit risk and counterparty  risk across its business. Credit risk is the potential for reduction in  the value of investments which results from  the perceived level of risk of an investment  issuer being unable to meet its obligations  (defaulting). Counterparty risk is a type of  credit risk and relates to the risk that the  counterparty to any contract we enter into  being unable to meet their obligations  causing us to suffer loss. The Group has some appetite to take credit  risk where it arises from profit-generating  insurance activities, to the extent that it  remains part of a balanced portfolio of  sources of income for shareholders and is  compatible with a robust solvency position. A number of risk management tools are  used to manage and mitigate this credit  risk, including the following:  — A credit risk policy and dealing  and controls policy;  — Risk appetite statements and limits  that have been defined on issuers,  and counterparties;  — Collateral arrangements for derivative,  secured lending reverse repurchase  and reinsurance transactions;  — The Group Credit Risk Committee’s  oversight of credit and counterparty  credit risk and sector and/or name- specific reviews;  — Regular assessments; and  — Close monitoring or restrictions on  investments that may be of concern. Debt and loan portfolio (Audited) Prudential’s UK and Europe business is  exposed to credit risk on fixed income  assets in the shareholder-backed portfolio.  At 31 December 2018, this portfolio  contained fixed income assets worth  £21.6 billion. M&GPrudential’s debt  portfolio reduced by £12.1 billion following  the transfer of fixed income assets to  Rothesay Life as part of the reinsurance  agreement announced in March 2018.  Credit risk arising from a further  £64.3 billion of fixed income assets is borne  largely by the with-profits fund, to which  the shareholder is not exposed directly  although under extreme circumstances  shareholder support may be required if the  fund is unable to meet payments as they  fall due.  Credit risk also arises from the debt  portfolio in the Asia business, the value of  which was £45.8 billion at 31 December  2018. The majority (68 per cent) of the  portfolio is in unit-linked and with-profits  funds and so exposure of the shareholder  to this component is minimal. The  remaining 32 per cent of the debt portfolio  is held to back the shareholder business. In the general account of the Jackson  business £41.6 billion of fixed income  assets are held to support shareholder  liabilities including those from our fixed  annuities, fixed index annuities and life  insurance products. Jackson’s general  account portfolio increased by circa  £4 billion due to the John Hancock  acquisition. The shareholder-owned debt and loan  portfolio of the Group’s other operations  was £2.0 billion as at 31 December 2018. Further details of the composition and  quality of our debt portfolio, and exposure  to loans, can be found in the IFRS financial  statements. In Asia, our exposure to interest rate  risk arises from the guarantees of some  non-unit-linked investment products,  including the Hong Kong with-profits  business. This exposure exists because of  the potential for asset and liability mismatch  which, although it is small and managed  appropriately, cannot be eliminated. Jackson is affected by interest rate  movements to its fixed annuity book where  the assets are primarily invested in bonds  and shareholder exposure comes from the  mismatch between these assets and the  guaranteed rates that are offered to  policyholders. Interest rate risk results  from the cost of guarantees in the variable  annuity and fixed index annuity business,  which may increase when interest rates  fall. The level of sales of variable annuity  products with guaranteed living benefits  is actively monitored, and the risk limits we  have in place help to ensure comfort with  the level of interest rate and market risks  incurred as a result. Derivatives are also  used to provide some protection. Foreign exchange risk (Audited) The geographical diversity of Prudential’s  businesses means that it has some  exposure to the risk of foreign exchange  rate fluctuations. The operations in the  US and Asia, which represent a large  proportion of operating profit and  shareholders’ funds, generally write  policies and invest in assets in local  currencies. Although this limits the effect  of exchange rate movements on local  operating results, it can lead to fluctuations  in the Group financial statements when  results are reported in UK sterling. This risk  is accepted within our appetite for foreign  exchange risk.  In cases where a surplus arises in an  overseas operation which is to be used  to support Group capital, or where a  significant cash payment is due from an  overseas subsidiary to the Group, this  currency exposure may be hedged where  it is believed to be favourable economically  to do so. Further, the Group generally does  not have appetite for significant direct  shareholder exposure to foreign exchange  risks in currencies outside the countries in  which it operates, but it does have some  appetite for this on fee income and on  non-sterling investments within the  with-profits fund. Where foreign exchange  risk arises outside appetite, currency swaps  and other derivatives are used to manage  the exposure. www.prudential.co.uk  Annual Report 2018  Prudential plc  63 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationShareholder exposure by rating1 5 1 2 Group sovereign debt (Audited) Prudential also invests in bonds issued by  national governments. This sovereign debt  represented 18 per cent or £14.4 billion of  the shareholder debt portfolio as at  31 December 2018 (31 December 2017:  19 per cent or £16.5 billion). 3 per cent of  this was rated AAA and 87 per cent was  considered investment grade (31 December  2017: 90 per cent investment grade).  The particular risks associated with holding  sovereign debt are detailed further in our  disclosures on risk factors.  4 3 1  AAA  2  AA  3  A  4  BBB  5  BB or below, or non-rated assets  9% 26% 31% 29% 5% Shareholder exposure by sector2 8 7 10 11 9 1 12 – 15 6 5 4 3 1   Financial  2   Government  3   Consumer, non-cyclical  4   Utilities  5   Industrial  6   Energy  7   Communications  8   Consumer, cyclical  9   Basic materials  10  Real estate  11  Technology  12  Mortgage securities  13  Diversified  14  Asset-backed securities  15  Other  2 29.73% 20.41% 11.79% 11.79% 6.48% 4.52% 3.57% 3.56%  1.98% 1.90% 1.74% 0.67% 0.44% 0.39% 1.03% The exposures held by the shareholder- backed business and with-profits funds in  sovereign debt securities at 31 December  2018 are given in note C3.2(f) of the  Group’s IFRS financial statements. Bank debt exposure and counterparty credit risk (Audited) Prudential’s exposure to banks is a key part  of its core investment business, as well as  being important for the hedging and other  activities undertaken to manage its various  financial risks. Given the importance of its  relationship with its banks, exposure to  the sector is considered a material risk for  the Group.  The exposures held by the shareholder- backed business and with-profits funds in  bank debt securities at 31 December 2018  are given in note C3.2(f) of the Group’s  IFRS financial statements. The exposure to derivative counterparty  and reinsurance counterparty credit risk is  managed using an array of risk management  tools, including a comprehensive system  of limits. Where appropriate, Prudential  reduces its exposure, buys credit protection  or uses additional collateral arrangements to  manage its levels of counterparty credit risk. At 31 December 2018, shareholder  exposures by rating1 and sector2 are  shown below:  — 95 per cent of the shareholder portfolio  is investment grade rated. In particular,  66 per cent of the portfolio is rated A-  and above (or equivalent); and  — The Group’s shareholder portfolio is  well diversified: no individual sector  makes up more than 15 per cent of the  total portfolio (excluding the financial  and sovereign sectors). c. Liquidity risk Prudential’s liquidity risk arises from the  need to have sufficient liquid assets to  meet policyholder and third-party  payments as they fall due. This  incorporates the risk arising from funds  composed of illiquid assets and results  from a mismatch between the liquidity  profile of assets and liabilities. Liquidity  risk may impact on market conditions  and valuation of assets in a more uncertain  way than for other risks like interest rate or  credit risk. It may arise, for example, where  external capital is unavailable at sustainable  cost, increased liquid assets are required  to be held as collateral under derivative  transactions or where redemption requests  are made against Prudential external funds. Prudential has no appetite for liquidity  risk, ie for any business to have insufficient  resources to cover its outgoing cash flows,  or for the Group as a whole to not meet  cash flow requirements from its debt  obligations under any plausible scenario. The Group has significant internal sources  of liquidity, which are sufficient to meet all  of our expected cash requirements for at  least 12 months from the date the financial  statements are approved, without having  to resort to external sources of funding.  The Group has a total of £2.6 billion of  undrawn committed facilities that can be  made use of, expiring in 2023. Access to  further liquidity is available through the  debt capital markets and an extensive  commercial paper programme in place,  and Prudential has maintained a consistent  presence as an issuer in the market for the  past decade. A number of risk management tools are  used to manage and mitigate this liquidity  risk, including the following:  — The Group’s liquidity risk policy;  — Risk appetite statements, limits  and triggers;  — Regular assessment at Group and  business units of LCRs which are  calculated under both base case and  stressed scenarios and are reported  to committees and the Board;  — The Group’s Liquidity Risk  Management Plan, which includes  details of the Group Liquidity Risk  Framework as well as gap analysis of  liquidity risks and the adequacy of  available liquidity resources under  normal and stressed conditions; 64  Prudential plc  Annual Report 2018  www.prudential.co.uk Group Chief Risk Officer’s report of the risks facing our business and how these are managed continued — Regular stress testing;  — Our contingency plans and identified  sources of liquidity;  — The Group’s ability to access the money  and debt capital markets;  — Regular deep dive assessments; and  — The Group’s access to external  committed credit facilities. 6.3 Risks from our products a. Insurance risk Insurance risk makes up a significant  proportion of Prudential’s overall risk  exposure. The profitability of its  businesses depends on a mix of factors,  including levels of, and trends in,  mortality (policyholders dying),  morbidity (policyholders becoming  ill) and policyholder behaviour  (variability in how customers interact  with their policies, including utilisation  of withdrawals, take-up of options and  guarantees and persistency, ie lapsing  of policies), and increases in the costs  of claims, including the level of medical  expenses increases over and above price  inflation (claim inflation). The Group has appetite for retaining  insurance risks in order to create  shareholder value in the areas where it  believes it has expertise and controls to  manage the risk and can support such risk  with its capital and solvency position. The principal drivers of the Group’s  insurance risk vary across its business  units. At M&GPrudential, this is  predominantly longevity risk. Across  Asia, where a significant volume of health  protection business is written, the most  significant insurance risks are morbidity  risk, persistency risk, and medical inflation  risk. In Jackson, policyholder behaviour  risk is particularly material, especially in  the take up of options and guarantees on  variable annuity business. The Group manages longevity risk in  various ways. Longevity reinsurance is  a key tool in managing this risk. In March  2018, the Group’s longevity risk exposure  was significantly reduced by reinsuring  £12 billion in UK annuity liabilities to  Rothesay Life, pursuant to a Part VII  transfer of the majority of these liabilities  expected to be completed by 30 June  2019. Although Prudential has withdrawn  from selling new UK annuity business,  given its significant annuity portfolio the  assumptions it makes about future rates of  improvement in mortality rates remain key  to the measurement of its insurance  liabilities and to its assessment of any  reinsurance transactions. Prudential  continues to conduct research into  longevity risk using both experience from  its annuity portfolio and industry data.  Although the general consensus in recent  years is that people are living longer, the  rate of increase has slowed in recent years,  and there is considerable volatility in  year-on-year longevity experience, which  is why it needs expert judgement in setting  its longevity basis. Prudential’s morbidity risk is mitigated by  appropriate underwriting when policies  are issued and claims are received. Our  morbidity assumptions reflect our recent  experience and expectation of future  trends for each relevant line of business. In Asia, Prudential writes significant  volumes of health protection business, and  so a key assumption is the rate of medical  inflation, which is often in excess of general  price inflation. There is a risk that the  expenses of medical treatment increase  more than expected, so the medical claim  cost passed on to Prudential is higher than  anticipated. Medical expense inflation risk  is best mitigated by retaining the right to  reprice our products each year and by  having suitable overall claim limits within  its policies, either limits per type of claim  or in total across a policy. The Group’s persistency assumptions  reflect similarly a combination of recent  past experience for each relevant line of  business and expert judgement, especially  where a lack of relevant and credible  experience data exists. Any expected  change in future persistency is also  reflected in the assumption. Persistency  risk is managed by appropriate training  and sales processes and managed locally  post-sale through regular experience  monitoring and the identification of  common characteristics of business  with high lapse rates. Where appropriate,  allowance is made for the relationship  (either assumed or observed historically)  between persistency and investment  returns and any additional risk is accounted  for. Modelling this dynamic policyholder  behaviour is particularly important when  assessing the likely take-up rate of options  embedded within certain products.  The effect of persistency on the Group’s  financial results can vary but depends  mostly on the value of the product  features and market conditions. Prudential’s insurance risks are managed  and mitigated using the following:  — The Group’s insurance and  underwriting risk policies;  — The risk appetite statements, limits  and triggers;  — Using longevity, morbidity and  persistency assumptions that reflect  recent experience and expectation of  future trends, and industry data and  expert judgement where appropriate;  — Using reinsurance to mitigate longevity  and morbidity risks;  — Ensuring appropriate medical  underwriting when policies are issued  and appropriate claims management  practices when claims are received in  order to mitigate morbidity risk;  — Maintaining the quality of sales  processes and using initiatives to  increase customer retention in order  to mitigate persistency risk;  — Using product repricing and other  claims management initiatives in order  to mitigate medical expense inflation  risk; and  — Regular deep dive assessments. 6.4 Risks from our business operations a. Strategic and transformation risks A number of significant change  programmes are currently running in order  to implement the Group’s strategy and the  need to comply with emerging regulatory  changes. These include, but are not limited  to, the discontinuation of LIBOR and  implementation of new international  accounting standards – see section 6.1a.  above for further information. This has  resulted in a significant portfolio of change  initiatives which increases the  transformation risks for the Group, and is  likely to further increase in the future. In  particular the demerger of M&GPrudential  from the rest of the Group has resulted in  a substantial transformation programme  which needs to be delivered alongside, and  in conjunction with other material change  programmes. The scale and the complexity  of this portfolio of transformation  programmes could impact business  operations, weaken the control  environment, impact customers, and has  the potential for reputational damage if  these programmes fail to deliver their  objectives. Implementing further strategic  initiatives may amplify these risks. www.prudential.co.uk  Annual Report 2018  Prudential plc  65 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationOther significant change initiatives are  occurring across the Group that increase  the likelihood and potential impact of risks  associated with:  — Complex dependencies between  multiple programmes spanning  different businesses;  — The organisational ability to absorb  change being exceeded while  maintaining a stable and robust  control environment ;  — Unrealised business objectives/ benefits; and  — Failures in programme and/or project  design, execution or transition into  business as usual. b. Non-financial risks In the course of doing business, the Group  is exposed to non-financial risks arising  from its operations, the business  environment and its strategy. The main  risks across these areas are detailed below.  Operational risks Prudential defines operational risk as the  risk of loss (or unintended gain or profit)  arising from inadequate or failed internal  processes, personnel or systems, or from  external events. This includes employee  error, model error, system failures, fraud or  some other event which disrupts business  processes or has a detrimental impact to  customers. Processes are established for  activities across the scope of our business,  including operational activity, regulatory  compliance, and those supporting  environmental, social and governance  (ESG) activities more broadly, any of which  can expose us to operational risks. A large  volume of complex transactions are  processed by the Group across a number of  diverse products, and are subject to a high  number of varying legal, regulatory and tax  regimes. Prudential has no appetite for  material losses (direct or indirect) suffered  as a result of failing to develop, implement  or monitor appropriate controls to manage  operational risks.  The Group’s outsourcing and third-party  relationships require distinct oversight and  risk management processes. A number of  important third-party relationships exist  which provide the distribution and  processing of Prudential’s products, both   as market counterparties and as outsourcing  partners. M&GPrudential outsources  several operations, including a significant  part of its back office, customer facing  functions and a number of IT functions.   In Asia, the Group continues to expand  its strategic partnerships and renew  bancassurance arrangements. These  third-party arrangements support  Prudential in providing a high level and  cost-effective service to our customers, but  they also make us reliant on the operational  performance of our outsourcing partners. The Group’s requirements for the  management of material outsourcing  arrangements, which are in accordance  with relevant applicable regulations, are  included through its well-established  Group-wide third-party supply policy.  Third-party management is also included  in embedded in the Group-wide  framework and risk management for  operational risk (see further, below).  Third-party management forms part of the  Group’s Operational Risk categorisations  and a defined qualitative risk appetite  statement, limits and triggers are in place.  The performance of the Group’s core  business activities places reliance on the  IT infrastructure that supports day-to-day  transaction processing and administration.  The IT environment must also be secure  and an increasing cyber risk threat needs  to be addressed as the Group’s digital  footprint increases and the sophistication  of cyber threats continue to evolve –  see separate information security risk  sub-section below. The risk that  Prudential’s IT infrastructure does not  meet these requirements is a key area of  focus for the Group, particularly the risk  that legacy infrastructure supporting core  activities/processes affects business  continuity or impacts on business growth.  Operational challenges also exist in keeping  pace with regulatory changes This requires  implementing processes to ensure we are,  and remain, compliant on an ongoing basis,  including regular monitoring and reporting.  The high rate of global regulatory change,  in an already complex regulatory landscape,  increases the risk of non-compliance due to  a failure to identify, interpret correctly,  implement and/or monitor regulatory  compliance. The change in Group-wide  supervisor, and the supervisory  framework, to which Prudential plc will  be subject to after the demerger of  M&GPrudential, means that additional  processes, or changes to existing ones, may  be required to ensure ongoing compliance.  See the ‘Global regulatory and political risk’  section above. Legislative developments  over recent years, together with enhanced  regulatory oversight and increased  capability to issue sanctions, have resulted  in a complex regulatory environment that  may lead to breaches of varying magnitude  if the Group’s business-as-usual operations  are not compliant. As well as prudential  regulation, the Group focuses on conduct  regulation, including those related to sales  practice and anti-money laundering,  bribery and corruption. There is a  particular focus on regulations related  to the latter in newer/emerging markets. Group-wide framework and risk management for operational risk The risks detailed above form key elements  of the Group’s operational risk profile. In  order to identify, assess, manage, control  and report effectively on all operational  risks across the business, a Group-wide  operational risk framework is in place.  The key components of the framework are:   — Application of a risk and control  assessment (RCA) process, where  operational risk exposures are identified  and assessed as part of a periodical  cycle. The RCA process considers a  range of internal and external factors,  including an assessment of the control  environment, to determine the  business’s most significant risk  exposures on a prospective basis;  — An internal incident management  process, which identifies, quantifies  and monitors remediation conducted  through root cause analysis and  application of action plans for risk events  that have occurred across the business;  — A scenario analysis process for the  quantification of extreme, yet plausible  manifestations of key operational risks  across the business on a forward- looking basis. This is carried out at least  annually and supports external and  internal capital requirements as well as  informing risk oversight activity across  the business; and  — An operational risk appetite framework  that articulates the level of operational  risk exposure the business is willing to  tolerate, covering all operational risk  categories, and sets out escalation  processes for breaches of appetite. Outputs from these processes and  activities performed by individual business  units are monitored by the Group Risk  function, which provides an aggregated  view of the risk profile across the business  to the Group Risk Committee and Board. These core framework components are  embedded across the Group via the Group  Operational Risk Policy and Standards  documents, which set out the key  principles and minimum standards for  the management of operational risk  across the Group. 66  Prudential plc  Annual Report 2018  www.prudential.co.uk Group Chief Risk Officer’s report of the risks facing our business and how these are managed continuedthe Group. As well as preventative risk  management, it is fundamental that robust  critical recovery systems are in place in the  event of a successful attack on the Group’s  infrastructure, breach of information  security or failure of its systems to retain  its customer relationships and trusted  reputation. In 2018, the organisational structure and  governance model for cyber security  management was revised with the  appointment of a Group Chief Information  Security Officer, and a repositioning of the  function to allow increased focus on  execution. This organisational change will  increase the Group’s efficiency and agility  in responding to cyber security related  incidents, and will facilitate increased  collaboration between business units and  leverages their respective strengths in  delivering the Group-wide Information  Security Programme.  The objectives of the programme include  achieving consistency in the execution of  security disciplines across the Group and  improving visibility across the Group’s  businesses; deployment of automation to  detect and address threats; and achieving  security by design by aligning subject  matter expertise to the Group’s digital and  business initiatives to embed security  controls across platforms and ecosystems. The Board receives periodic updates on  information security risk management  throughout the year. Group functions work  with the business units to address risks  locally within the national and regional  context of each business following the  strategic direction of the Group-wide  information security function. The Group Operational Risk Policy,  standards and operational risk appetite  framework sit alongside other risk policies  and standards that individually engage with  key operational risks, including outsourcing  and third-party supply, business continuity,  technology and data, operations processes  and extent of transformation. Business resilience Business resilience is at the core of the  Group’s well embedded Business  Continuity Management (BCM)  programme, with BCM being one of a  number of activities undertaken by the  Group Security function that protect our  key stakeholders. These policies and standards include  subject matter expert-led processes that  are designed to identify, assess, manage  and control operational risks, including  the application of:   — A transformation risk framework that  assesses, manages and reports on the  end-to-end transformation lifecycle,  project prioritisation and the risks,  interdependencies and possible  conflicts arising from a large portfolio  of transformation activities;  — Internal and external review of cyber  security capability and defences;   — Regular updating and testing of  elements of disaster-recovery plans and  the Critical Incident Procedure process;  — Group and business unit-level  compliance oversight and testing in  respect of adherence with in-force  regulations;   — Regulatory change teams in place  to assist the business in proactively  adapting and complying with  regulatory developments;  — A framework in place for emerging risk  identification and analysis in order to  capture, monitor and allow us to prepare  for operational risks that may crystallise  beyond the short-term horizon;   — Corporate insurance programmes to  limit the financial impact of operational  risks; and  — Reviews of key operational risks and  challenges within Group and business  unit business plans.  These activities are fundamental in  maintaining an effective system of  internal control, and as such outputs  from these also inform core RCA,  incident management and scenario  analysis processes and reporting on  operational risk. Furthermore, they  also ensure that operational risk  considerations are embedded in key  business decision-making, including  material business approvals and in setting  and challenging the Group’s strategy. Prudential operates a BCM programme  and framework that is linked with its  business activities, which considers key  areas including business impact analyses,  risk assessments, incident management  plans, disaster recovery plans, and the  exercising and execution of these plans.  The programme is designed to achieve a  business continuity capability that meets  evolving business needs and is appropriate  to the size, complexity and nature of the  Group’s operations, with ongoing proactive  maintenance and improvements to  resilience against the disruption of the  Group’s ability to meet its key objectives  and protect its brand and reputation. The  BCM programme is supported by Group-  wide governance policies and procedures  and is based on industry standards that  meet legal and regulatory obligations. Business disruption risks are monitored  by the Group Security function, with key  operational effectiveness metrics and  updates on specific activities being  reported to the Group Risk Committee  where required and discussed by cross- functional working groups. Information security risk and data privacy Information security risk remains an area of  heightened focus after a number of recent  high-profile attacks and data losses across  industries. Criminal capability in this area is  maturing and industrialising, with an  increased level of understanding of  complex financial transactions which  increases the risks to the financial services  industry. The threat landscape is  continuously evolving, and the systemic  risk of sophisticated but untargeted attacks  is rising, particularly during times of  heightened geopolitical tensions. Recent developments in data protection  worldwide (such as GDPR that came into  force in May 2018) increases the financial  and reputational implications for Prudential  of a breach of its (or third-party suppliers’)  IT systems. As well as data protection,  increasingly stakeholder expectations  are that companies and organisations use  personal information transparently and  appropriately. Given this, both information  security and data privacy are key risks for  www.prudential.co.uk  Annual Report 2018  Prudential plc  67 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationViability statement prepared in accordance with the provision C.2.2 of the UK code The Group’s longer-term prospects The Group’s strategy is based around  meeting the long-term savings and  protection needs of its customers and  hence creating value for both customers  and shareholders over a time frame that  can be many years. As described on pages  12 to 13, the Group’s business model  supports this strategy by constantly  evolving our products to meet changing  customers’ needs, building out and  diversifying distribution capabilities and  relationships to reach new customers and  investing in technology to better empower  and serve the salesforce and customers.  Examples of the actions undertaken during  2018 are set out on pages 18 to 37. These  activities are underpinned by ongoing risk  management, implemented via the Group  Risk Framework and risk appetite limits  described on pages 55 to 58. The Group’s  management of wider environmental,  social and governance issues that could  pose a risk in the future to the Group is set  out in the Corporate responsibility review  on pages 71 to 72. This collective focus  supports the sustainability of our business  over the longer term.  The Directors regularly consider strategic  matters that may affect the longer-term  prospects of the Group. In the current year  this included the impact of the proposed  demerger of M&GPrudential, announced  in March 2018. Further, the Group as a  whole and each of its life assurance  operations are subject to extensive  regulation and supervision, which are  designed primarily to reinforce the Group’s  management of its long-term solvency,  liquidity and viability to ensure that it can  continue to meet obligations to  policyholders. Further details on the  current capital strength of the Group are  provided on pages 48 to 50. For the purposes of assessing the Group’s  viability, the Directors considered those  risks where the impact of possible adverse  external developments could be of such  speed and severity to present a shock to  the Group’s financial position. The risks  considered, from those detailed on pages  58 to 59, are: market risk, credit risk,  liquidity risk and regulatory risk. In addition  the Directors considered the operational  and financial risks arising from the UK’s  intended departure from the European  Union in a number of possible scenarios,  including those which assume no  withdrawal agreement is enacted.  To evaluate the Group’s resilience to  significant deteriorations in market and  credit conditions and other shock events,  these risks are grouped together into  severe but plausible scenarios which are  then applied to the assumptions underlying  the business plans considered. For  example, the impacts of scenarios  assuming a disorderly transition to a higher,  more normalised interest rate environment  and an international recession (causing a  fall in interest rates and in equity and  property values, together with an increase  in credit spreads and credit losses on debt  assets and higher policyholder lapse rates)  were considered in the preparation of the  most recent business plan, together with  the impact on liquidity of a scenario  assuming the closure of short-term debt  markets for three months. In addition, the  Group conducts an annual reverse stress  test which gives the Directors an  understanding of the maximum resilience  of the Group to extremely severe adverse  scenarios.  The scenarios tested showed that the  Group with or without the demerger  would be able to maintain viability, over the  three-year period under assessment, after  taking account of the actions available to  management to mitigate the impacts on  capital and liquidity in such scenarios. Period of viability assessment The Directors have assessed the viability  of the Group for a period longer than  the 12 months required by the going  concern statement.  The Directors performed the assessment  by reference to the three-year period to  December 2021. Three years is considered  an appropriate period as it represents the  period covered by the detailed business  plan that is prepared annually on a rolling  three-year basis. In approving the business  plan, the Directors review the Group’s  projected performance with regards to  profitability, cash generation and capital  position, together with the parent  company’s liquidity over this three-year  period. This projection involves setting  a number of economic and other  assumptions that are inherently volatile  over a much longer reporting period. Such  assumptions include foreign exchange  rates, interest rates, economic growth  rates and the impact on the business  environment arising from events such as  the exit of the United Kingdom from the  European Union or changes in regulation. The intended demerger of M&GPrudential  from the Group, if approved by  shareholders, is expected to occur within  the period covered by the viability  statement. The Directors have therefore  considered the ability of the Group to  continue in its current form (ie the scenario  in which the demerger does not proceed)  for the three-year period ending  31 December 2021 as well as the viability  of the Group if the demerger proceeds  as planned. Assessment of risks over the period The Group’s business plan implements the  Group’s strategic objectives through the  business model and activities discussed on  pages 10 to 13. This year’s business  planning process considered the results of  the current Group over the planning period  as well as those of the Group post  demerger. As noted above, underpinning  the projections in the business plan are a  number of economic and other  assumptions. Assessment of the risks to  achieving the projected performance  therefore remains an integral part of the  planning process. The Group’s approach to  risk management and a summary of the key  risks facing the Group are set out on pages  52 to 69. 68  Prudential plc  Annual Report 2018  www.prudential.co.uk Group Chief Risk Officer’s report of the risks facing our business and how these are managed continuedThe impact on the business of known areas  of regulatory change whose financial  implications can be reasonably quantified  is also considered as part of the plan. As  well as known areas of regulatory change  the Group is exposed to the risk of sudden  and unexpected changes in regulatory  requirements at the Group and local level.  While unexpected changes cannot be fully  anticipated and hence modelled, the risk of  regulatory change is mitigated by capital  held by the Group and its subsidiaries in  excess of Group and local regulatory  requirements, the Group and its  subsidiaries’ ability to generate significant  capital annually through operational  delivery and the availability of  compensating actions designed to restore  key capital and solvency metrics. Conclusion on viability Based on this assessment, the Directors  have a reasonable expectation that  the Group will be able to continue in  operation and meet its liabilities as they  fall due over the three-year plan period  to December 2021. James Turner Group Chief Risk Officer www.prudential.co.uk  Annual Report 2018  Prudential plc  69 Notes 1  Based on hierarchy of Standard & Poor’s, Moody’s and Fitch,  where available and if unavailable, other rating agencies or  internal ratings have been used. 2  Source of segmentation: Bloomberg Sector, Bloomberg  Group and Merrill Lynch. Anything that cannot be identified  from the three sources noted is classified as other. Excludes  debt securities from other operations. 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationCorporate responsibility review A long-term view We want to create a positive legacy from all our business activities. We aim to provide value to our customers through the products we deliver and to our shareholders through our positive financial performance. At the same time we recognise the importance of providing benefits to all our stakeholders, whether through our community investment programmes, our environmental impact, our engagement and talent development with our colleagues or our approach to responsible investment. Non-financial information statement As a global provider of savings and  protection products, stewardship is core  to what we do. We recognise that to help  our customers look to the future with  confidence, we need to take a long-term  view on a wide range of issues that affect our  business and the communities in which we  operate. To do this, we maintain a proactive  dialogue with our stakeholders – customers,  investors, employees, communities,  regulators and governments – to ensure  that we are managing these issues  sustainably and delivering long-term value.  Further information on our engagement  with our stakeholders will be provided in  our upcoming 2018 ESG report, which will  be published in May 2019. This Strategic report complies with the  Non-Financial Reporting requirements  contained in sections 414CA and 414CB  of the Companies Act 2006.  The diagram below provides a guide to the  sections of this Strategic report that fulfil  these requirements: Responsible investment Environment Overview, relevant risks and associated  management practices – page 71 Relevant KPIs: greenhouse gas emissions –  pages 75 to 77 Environmental matters Suppliers Overview, relevant risks and   associated management practices  – page 72 People Overview, relevant risks and  associated management practices  – page 71 Relevant KPIs: gender diversity –  page 79 Employees Human rights Group-wide policies and due diligence – pages 72 to 73 Anti-bribery and anti-corruption matters Social matters Business integrity Overview, relevant risks and  associated management practices  – page 71 Business model – pages 12 to 13  Principal risks – pages 58 to 69 Communities Technology Relevant KPIs: community  investments, fundraising and  donations, employee voluntary  hours – page 85 70  Prudential plc  Annual Report 2018  www.prudential.co.uk This corporate responsibility review  provides an overview of our activities and  progress in 2018 across a range of areas in  which we have helped to provide benefits  to stakeholders throughout the markets in  which we operate. It also includes an  overview of our Environmental, social  and governance (ESG) activities.  For us, ESG means:  — What we do – the products we offer,  our customer service, our human capital  and our investment management; and  — How we do it – understanding our  customers and providing suitable  solutions that meet their needs, building  long-term profitable relationships,  investing in our people and making  responsible investments, to generate  sustainable long-term returns in line  with our risk appetite, to meet our  customers’ needs.  Our ESG approach underpins the delivery  of our strategy, generating sustainable  earnings and resilient capital growth,  enabling us to deliver on our promises to  our customers. More detailed information on our corporate  responsibility and ESG activities is available  online at www.prudential.co.uk/ corporate-responsibility and in our 2018  ESG report, which will be published in  May 2019. How we govern ESG We established an ESG Executive  Committee (ESG ExCo) in 2018 to lead on  how we identify, manage and report on  material ESG risks. Our ESG sponsor,  Jonathan Oliver (Group Executive  Committee member), was nominated as  Chair and is supported by senior leaders  from Group operations, across financial  reporting, investor relations, risk,  compliance, operations, investment and  human resources. There is representation  from our business units, provided by the  Chief Investment Officers of our asset  management businesses (PPM America  (PPMA) and Eastspring), M&G’s Head of  Corporate Finance and Stewardship and  Jackson’s General Counsel. The ESG ExCo  meets quarterly and reports to the Board  at least twice each year, with additional  ad hoc reporting provided as necessary.  Our ESG ExCo is focused on the holistic  assessment of ESG matters material to the  Group, raising matters for Board decision- making and implementing resulting  decisions, supporting the sustainable  delivery of the Group’s strategy. Managing our material ESG issues – summary Responsible investment As a life insurer, asset owner and manager,  we are long-term stewards of our customers’  assets and we recognise the importance of  ESG matters. We also recognise our  responsibility to our customers, society and  the environment to effectively integrate  associated considerations into investment  decisions and fiduciary and stewardship  duties, helping to finance a more  sustainable economy. Environment We recognise the risks and opportunities  posed by climate change and our impact  on the environment, and as such we strive  to play our part in reducing both our direct  and indirect impacts where possible. Our  approach includes not only understanding  our impact on the environment, through  measuring and improving the  environmental performance of our global  operations, but also developing our  understanding of the environment’s  potential impact on our business. People We foster a diverse and inclusive  organisation that develops and protects  our people’s interests, wellbeing and  health. Developing talent and valuing  diversity is key to how we operate and  deliver outstanding results for our  customers, shareholders and communities. Data protection and cyber security New technologies present new risks, from  privacy to cyber security, and we are  vigilant in working to identify these and to  manage old and new risks in ways that are  proportionate to and commensurate with  the threats our business faces. At the same  time, we are making significant investments  in technology as we continue to upgrade  our digital capabilities to provide a more  seamless customer experience.  Communities Our business purpose, the interests of  our stakeholders and our drive to ensure  economic and social progress for the  long term are central to our community  investment strategy. This strategy has four  principal themes: social inclusion, financial  education and life skills, disaster  preparedness and employee engagement,  and we continued to be active in all these  areas during 2018.  We maintain long-term relationships with  our charity partners, providing support  through both funding and skills-based  volunteering led by our employees.  Business integrity We embed responsible and ethical  behaviour across our organisation. From how  we conduct ourselves, shape and monitor  our culture and meet our responsibility to  prevent bribery and corruption, through  to transparency in our tax practices, our  contribution to the global economy and  our leadership role in our industry, we  are a responsible, ethical business.  Our governance framework, setting out  the principles by which we conduct our  business and ourselves, is built on our  Group Code of Business Conduct and our  Group Governance Manual. We contribute  to financial stability and sustainability in all  of the markets in which we operate. The  responsible and sustainable management  of our tax affairs helps us to maintain  constructive relations with our stakeholders  and play a positive role in the economy. We  take a long-term perspective and balance  our responsibility to support our business  strategy with our responsibility to the  communities in which we operate, which  need sustainable tax revenues.  We have a global footprint and maintain  business relationships with a range of  parties, such as agents and intermediaries,  who act on our behalf. As such, financial  crime is a key risk and we are committed to  fighting it through the maintenance and  implementation of policies and procedures  on anti-money laundering, counter- terrorist financing, anti-bribery and  corruption and anti-fraud, and through our  commitment to industry-wide efforts. We  operate a Group-wide whistle-blowing  programme, which is able to receive  reports from a variety of channels and is  supported by an independent third party  that captures and comprehensively records  matters raised.  Customers Our relationships with our customers are  long-term and are central to our ability to  continue creating sustainable value. We  provide fair, transparent, inclusive and  accessible products to best serve our  customers’ needs and to support them in  de-risking their lives. We are constantly  looking for new ways to innovate and  provide the highest level of service.  We take our commitment to our customers  seriously when training our personnel, who  deliver service consistent with our values.  Where customers have cause to complain  to us, we have documented procedures in  place to manage complaints received  through multiple touchpoints, in a timely,  robust and professional manner. www.prudential.co.uk  Annual Report 2018  Prudential plc  71 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationIn Asia, the health protection gap remains  large and continues to expand. In line with  our commitment to help close this gap and  protect our customers’ health, we have  continued our efforts to create best-in- class health capabilities by offering more  comprehensive and flexible coverage and  a wider range of value-added services.  Increasing access to financial protection is  a significant socio-economic issue and we  seek to provide the right products through  appropriate means to improve access for  new and existing customers. We also strive  to communicate information about our  products in a fair and transparent way.  In the US, Jackson continues to be a leader  in shifting perspectives and simplifying  the language around financial products. Suppliers Managing ESG risks when sourcing goods  and services, and throughout the lifecycle  of our third-party relationships, is vital to  our position as an ethical and responsible  business. We take this position seriously  and seek to both maximise value and  minimise risk throughout our interactions  with our supply chain. We work with a range of partners that  support our business units with our IT  network and systems, specialist  professional and advisory services,  facilities management, contractors and the  agents that form our distribution network.  Our Group Code of Business Conduct  outlines the values and standards that we  require of each of our suppliers. We act  with integrity to ensure that modern  slavery, human trafficking, child labour  or any other issue that subjugates human  rights is eradicated from our supply chain. Our business units are responsible for  managing third-party supply arrangements  and able to adopt further policies as they  require, to meet localised operating  conditions. Business units conduct due  diligence before engaging with and  ultimately selecting a new supplier. During  this process, our employees are trained to  ensure that the contractual arrangements  reflect the requirements of those policies.  We perform regular due diligence, review  meetings and audits, where required, and  our policies and procedures are supported  by regular employee training exercises.  Our ‘Speak Out’ whistleblowing service  enables employees to raise any concerns  they may have in relation to our third-party  relationships, and our contractors and  third-party suppliers are also able to use  this service. ESG policy framework – Group Governance Manual The Group Governance Manual (GGM) establishes standards for managing key material ESG issues across the Group, setting out the  policies and procedures to support how we operate. The GGM is used to ensure that we comply with relevant statutory and regulatory  requirements. Our Group-wide policies relating to our identified material issues include: Material ESG issues Our Group-wide policies* Business integrity  — Code of Business Conduct Policy details our required standards to be used across the Group and covers our  employees and individuals or organisations acting on our behalf. It is governed by five standards: protection from  financial crime, avoiding conflicts of interest, managing information, communicating as a group and providing  equality for our people.   — Anti-Bribery and Corruption Policy covers our values for reputation, ethical behaviour and reliability. As an  organisation we are focused on financial practices that align to those values and we prohibit corruption or bribery  within our working practices.   — Anti-Money Laundering and Counter Terrorist Financing Policy outlines how we prohibit money laundering  or terrorist financing in our working practices, setting out how we establish parameters to prevent this taking  place across the organisation.   — Sanctions Policy details the commitment we have to comply with sanctions laws and regulations by screening,  prohibiting or restricting business activity, and following up through investigation.  — Security Policy outlines our commitment to ensuring security aligns to industry recommended practice for  managing our regulatory and legal obligations. This includes how we manage incidents under the ‘Speak Out’  programme, our whistle-blowing process.   — Tax Risk Policy includes our processes to manage tax-related risk, by identifying, measuring, controlling and  reporting on issues considered an operational, reputational or regulatory risk.   — Political Donations Policy outlines our position, that as an organisation we do not donate to political parties.  Customers  — Customer Commitments Policy covers our five key commitments to our customers and how we assess,  manage and report on these:  1  Treat customers fairly, openly and honestly; 2   Provide and promote a range of products and services that meet customer needs, are easy to understand  and that deliver real value; 3  Maintain the confidentiality of our customer information (except where the law requires disclosure); 4  Provide and promote high standards of customer service and monitor these standards rigorously; and  Ensure that our complaints processes provide an effective and fair means of arbitration between the  5  Group’s businesses and customers. 72  Prudential plc  Annual Report 2018  www.prudential.co.uk Corporate responsibility review continuedMaterial ESG issues Our Group-wide policies* Environment  — Environment Policy outlines our approach to understand and manage the direct environmental impact of the  Group. This covers our measurement, monitoring, review and reporting of issues associated with our  environmental performance.  Responsible investment  — Owing to the distinct investment risks faced by our asset management and ownership businesses, with each  investing in different markets and asset classes, each business manages ESG-related matters through the  pursuit of business-specific responsible investment policies. This is overlain by our Group-wide Responsible  Investment Framework, aligned to our Group-wide Code of Conduct and underpinned by our Group Responsible  Investment Standards. Suppliers  — Third-Party Supply Policy – an updated Third-Party Supply Policy was approved by the Group Risk Committee  in July 2018. It covers how we manage and oversee our third-party arrangements, through due diligence/ selection criteria, contractual requirements, the ongoing monitoring of such relationships and reporting and  escalation. Additionally, our policy considers the requirements of the UK Modern Slavery Act and the principles  of the UN’s Universal Declaration of Human Rights. Technology  — Privacy Policy governs the protection of data. The policy became operational in 2018 and complies with the  General Data Protection Regulation. People  — Diversity and Inclusion Policy sets out how we foster an inclusive workforce and ensure all our employees are  treated fairly and feel valued, and together have the diversity in skill sets and backgrounds that enriches the  organisation. Our policy considers a range of diversity aspects of our employees, including gender, age, ethnicity,  disability, sexual orientation and background. Further information on the diversity of our Board, our policy in  respect of this, how this is implemented and the associated results in 2018 can be found in our Governance  statement on pages 109 to 114.   — Employee Relations Policy outlines the way we engage our employees and motivate them to achieve success for  the Group: promoting positive relationships with employees, representative organisations and trade unions, and  maintaining a positive reputation for the treatment of employees.  — Performance and Learning Policy sets out the importance of our people and frames how we invest in their  development to deliver against our strategy and the future success of the organisation. This includes our  Performance Management Framework.   — Remuneration Policy outlines our effective approach to appropriately rewarding our employees in a way that  aligns incentives to business objectives and enables the recruitment, retention and incentivisation of high-calibre  employees in line with our risk appetite and Group Reward Principles.   — Talent Policy demonstrates how we attract and select the best people for roles that will ensure high performance  in the short term and improve the longer-term succession and talent pipeline. It sets out our fair and effective  approach to pursuing this.   — Health and Safety Policy covers our employees, business partners, customers and others that may be affected  by our operations. This details our health and safety core principles, our commitments and the measuring and  reporting on our health and safety performance. Communities  — Community Investment Policy covers how we are committed to working with the communities we operate in as  active and supportive members. This also outlines our strategy for investing in the community and how we make  investments and report against them.  * In addition to our Group-wide policies, our business units have underlying business-specific policy frameworks, reflecting their individual risks and operating environments.  For the purposes of this report, we focus primarily on the Group policy framework. www.prudential.co.uk  Annual Report 2018  Prudential plc  73 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationThe GGM is used as a platform for  mandating specific ways of working across  the Group. The chief executive of each  business unit attests annually to  compliance with applicable requirements  set out in the policies, including matters  that must be reported to the Group.  Specific procedures are followed for the  reporting of non-compliance. Business  units present such instances in their annual  certification, which in turn is reported to  the Group Audit Committee.  Due diligence on ESG-related policies Our GGM forms part of the Group Risk  Framework, which details how business  units should put in place sufficient  processes that identify, evaluate and  manage risks, incorporating key ESG  issues. Due diligence is conducted by the  business units to ensure that the policies  are complied with and we require evidence  to demonstrate this. The Group Audit Committee reviewed  the results of the year-end certificate of  compliance with GGM requirements.  While several improvements to ensure  the policies are fully embedded were  discussed, no significant areas of non- compliance in relation to the policies  relevant to ESG issues were noted. For further information on our Group  business standards and policies pursued in  relation to our material ESG issues, refer to  the ‘Business standards’ pages of our  website at: www.prudential.co.uk/ responsibility/standards Further information on ESG issues Responsible investment As a life insurer, asset owner and manager,  we are long term stewards of our customers’  assets and we recognise the importance of  ESG matters. We also recognise our  responsibility to our customers, society and  the environment to effectively integrate  associated considerations into investment  decisions and fiduciary and stewardship  duties, helping to finance a more sustainable  economy. We believe that our investment  activities should help our customers both  today and over the long term. We take our  commitment to ESG and responsible  investment seriously, which is why our  asset management business units, M&G  Investments, PPMA, PPMSA and Eastspring  Investments, are signatories to the Principles  for Responsible Investment. Similarly, as a  life insurer we remain committed to  servicing our customers’ evolving needs,  providing product solutions that support  their financial resilience and enable them  to face the future with confidence.  Assessing the implications of evolving expectations of the Group in financing a sustainable and low-carbon economy Over 2018 there have been a number of  regulatory, supervisory and investor-driven  sustainable finance and climate-related  financial risk initiatives. From a supervisory  perspective, the International Association  of Insurance Supervisors and the Prudential  Regulation Authority (PRA) have made  clear that they expect insurers to assess and  consider the risks from climate change, with  the PRA releasing a consultation on a draft  supervisory statement. We engaged with  the PRA on the topic during 2018 and  continue to focus on developing our  practices in this area, with the implications  for us as a Group being considered by our  Board. Climate risk is under similar scrutiny  from the Financial Conduct Authority,  which issued a draft discussion paper on  the topic, and the Securities and Futures  Commission in Hong Kong launched its  Strategic Framework for Green Finance.  In addition to assessing the implications  for the Group of evolving regulatory and  supervisory expectations, we continued to  monitor the changing legislative landscape,  including developments set out in the  European Commission’s (EC) Action Plan  for Financing Sustainable Growth. Our  approach to meeting these evolving  expectations of financial institutions is  twofold: to consider the need for enhancing  our ESG integration and disclosure  practices and to continue to increase our  industry participation and collaboration  towards positive change. Further detail on  the progress we have made in responsible  investing in 2018, through engagement  with investees and the assets in which we  invest with regard to financing sustainable  growth, will be provided in our forthcoming  2018 ESG report.  Strengthening our governance of responsible investment Following on from the establishment of our  Group Responsible Investment Advisory  Committee (GRIAC) and Group  Responsible Investment Framework  in 2017, our governance of responsible  investment activities has continued to  be strengthened during 2018 by our  businesses. Each asset management  business now has a clearly designated  responsible investment committee. The  GRIAC links these independent business  unit committees, serving as a forum for  sharing best practice innovations across  the Group. It also enables our Group-wide  Responsible Investment Standards to be  adopted in a consistent manner across our  business units, while still affording them  the flexibility to manage investments in a  way that balances the needs of their clients  and the local regulatory environments in  which they operate.  In 2018 our Group Responsible Investment  Standards, which underpin our Group  Responsible Investment Framework and  Principles, were in the road-testing phase  with our businesses, which focused on  developing internal monitoring and  reporting capabilities to support the  implementation of the Standards.  Prudential Corporation Asia, for example,  has implemented a new investment  portfolio and risk management system as  part of the ongoing enhancement of its  approach to ESG integration. This provides  its regional and local investment offices  with increased transparency of how ESG  factors are being incorporated into its  investment decisions, manager selection  and manager reporting process, in line with  its commitment to responsible investing.  Eastspring has also embraced technology  solutions in 2018, with Group Digital  working in partnership with the investment  teams to develop tools that utilise artificial  intelligence and learning to facilitate faster  and scalable ESG screening of investee  companies. During 2018, M&G signed up  to using the new MSCI Carbon Portfolio  Analytics tool, enabling portfolio managers  to monitor a portfolio’s carbon emissions,  carbon intensity and fossil fuel reserves  and to support the better management  of carbon risks. Industry participation and collaboration on climate change We have long believed in the benefits that  collaboration and collective action can  bring on important issues. Active  consideration of ESG factors is integral to  our stewardship responsibilities. For this  reason, we as a Group and our businesses  remain active participants in industry  initiatives on sustainable finance on climate  change. M&G continues to participate in  the Climate Action 100+ initiative and  remains a member of the Institutional  Investors Group on Climate Change.  During 2018, Eastspring participated  in roundtables organised by its local  regulator, the Monetary Authority of  Singapore (MAS), to help raise awareness  of climate risk in the region and promote  the integration of ESG frameworks in  investment strategies. Similarly, Prudential  Singapore has engaged with its local  regulators (the Life Insurance Association  Singapore and MAS) to discuss its  approach to climate change risk as an  Asian asset owner. 74  Prudential plc  Annual Report 2018  www.prudential.co.uk Corporate responsibility review continuedPrudential remains an active member of the  ClimateWise initiative, a global network of  leading insurance industry organisations,  and an investor signatory to the Carbon  Disclosure Project. In 2018, we again  participated in the Asset Owner Disclosure  Project, a survey managed by ShareAction  to assess the insurance sector’s response to  addressing climate risk, where we ranked  30th out of 80 in the Global Climate  Insurance Index (an assessment of the  80 largest insurance companies globally)  (2017: 31st). In 2018, M&G collaborated  on enhancing industry climate-related  disclosure practices and signed up to a pilot  initiative sponsored by the United Nations  Environment Programme to work on  climate-change scenario modelling for  portfolios across different asset classes.  This is a central part of the Task Force on  Climate-related Financial Disclosures  (TCFD) framework, and the key output will  be an industry climate scenario modelling  tool. Further information in relation to the  Group’s support for the Financial Stability  Board’s (FSB) TCFD is provided below in  the section on ‘Managing climate risks and  opportunities and the FSB’s TCFD’ below. Evolving our ESG-focused investment product offering We continued to add to our ESG-focused  investment product offering over 2018, in  light of increasing interest and demand  from customers. M&GPrudential launched  two new retail funds in 2018, the M&G  Positive Impact Fund and the M&G  Sustainable Multi Asset Fund, both  employing a structured approach to  ESG integration and both investing in  companies that are aligned with the United  Nations Sustainable Development Goals.  The Positive Impact Fund seeks to invest in  companies that have a positive impact on  society through addressing the world’s  major social and/or environmental  challenges, while providing attractive  financial returns. Sustainability and impact  considerations are fundamental in the  stock selection process. The M&G Impact  team undertakes a ‘triple I’ approach to  identifying impactful investments,  analysing the investment case,  intentionality and impact of a company to  assess its suitability for the fund. The fund  won Best New Entrant (Fund) at the 2018  Investment Week Sustainable and ESG  Investment Awards. Managing climate risks and opportunities and the FSB’s TCFD As a life insurer, asset owner, asset  manager and occupier of over 400  properties worldwide, we recognise both  the risks and opportunities posed by  climate change on our businesses, and our  Group’s impact on the environment. Our  approach includes not only understanding  our impact on the environment, through  measuring and improving the  environmental performance of our global  operations, but also developing our  understanding of the environment’s  potential impact on our business. With  respect to the impact that climate change  poses to our businesses, we are cognisant  that the risks and opportunities may  manifest in a number of different ways.  We outline further detail on the specific  climate-related risks within the Group  Chief Risk Officer’s report on page 61.  We as a Group welcomed, and are  a signatory to, the FSB’s TCFD  Recommendations, which were released  in 2017. Our governance structures, which  provide oversight in this important area,  were enhanced in 2018 through the  establishment of our ESG ExCo, which will  oversee the Group’s processes to assess  the climate related risks and opportunities  facing our businesses, which are currently  under development, and the identification  and delivery of supporting implementation  activities, with the view to enhancing our  climate-related financial risk management  practices. Over the next year the Group  will take action to enhance the Group’s  climate-related financial risk management  practices and disclosure. Our strategy needs to be tailored to the  local US, Asian, European and African  countries in which we operate. Climate  change is a material challenge for the global  economy and, in conjunction with other  global trends, may impact each part of  the world differently. The physical risks  will be as difficult to determine as the risks  resulting from transitioning to a low-carbon  economy. Accompanying those risks are  inherent investment opportunities that  we will continue to explore, including the  emergence of infrastructure investments  as a new asset class. We are keen to  position our organisation in order to  best place us to respond to and manage  material climate risks and capitalise on  the opportunities from the economy’s  transition. Demonstrating our approach  and performance transparently to our  external stakeholders has always been  central to our vision, mission and values.  As an organisation with a long history,  we invest for the long term. Integrating  non-financial decision-making with our  current financial systems is a key part of  taking that long-term view and is a  continuing priority for the Group.  Further information on our approach to  responsible investment, including progress  made by our businesses during 2018 in  enhancing ESG integration, investing for  positive change and collaborating and  participating in industry initiatives, will be  found in our forthcoming 2018 ESG report. Environment Managing our direct environmental impact Cognisant of our direct environmental  impacts as an occupier of over 400  properties worldwide, we strive to play our  part in reducing our operational impacts  where possible. In 2016, we established a  global environmental targets framework  and roadmap to drive progress across a  range of environmental aspects and  impacts for our operational property  portfolio worldwide. This framework aligns  to our regional footprints covering Asia, the  UK and Europe and the US, reflecting the  maturity of environmental management  practices in these markets and the  autonomy given to our business units in  managing their operations.  We recognise the importance of our  own internal environmental targets and  decarbonisation goals in reducing our  direct footprint. In 2018, global energy use  across our occupied estate was 127,098  MWh (2017: 129,324 MWh), a decrease of  2 per cent. Our absolute Scope 1 and  Scope 2 (market based) Greenhouse Gas  (GHG) emissions decreased by 7 per cent  to 61,318 tCO2e (2017: 65,979 tCO2e  restated) across our occupied estate.  When normalised against net lettable floor  area, our Scope 1 and 2 emissions fell by  13 per cent to 99 kg CO2e/m2 influenced by  several factors such as decarbonisation of  the UK/European grid (cleaner electricity  generation), outsourcing our UK data  centres and a 7 per cent increase in  occupied floor area.  www.prudential.co.uk  Annual Report 2018  Prudential plc  75 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationFor the Group as a whole, further detail  on our environmental performance  throughout 2018 is available online and will  be published in our 2018 ESG report early  in 2019, including performance against our  global environmental objectives. Prudential plc – greenhouse gas emissions statement We have compiled our global GHG  emissions statement in accordance with  the Companies Act 2006 (Strategic and  Directors’ Reports) Regulations 2013. GHG  emissions are broken down into three  scopes; we have included full reporting for  Scope 1 and 2 and select Scope 3 reporting  as best practice.  Scope 1 emissions are our direct emissions  from the combustion of fuel, fugitive  emissions and company-owned vehicles.  Scope 2 emissions cover our indirect  emissions from the purchase of electricity,  heating and cooling. We have reported our  Scope 2 emissions using both the location  and market-based methods in line with the  GHG Protocol Scope 2 Guidance. Our  Scope 3 footprint includes UK/EU/Africa  booked business travel for the occupied  estate, global water consumption from the  occupied and investment estate (where  Prudential have operational control), waste  generated from occupied properties (UK  and US) and global investment properties  (where Prudential have operational  control). We continue to work with our  business units to review the extent of our  Scope 3 reporting and increase coverage  where practicable.   Please refer to our Basis of Reporting and  supplementary reporting online for further  detail on our methodology, reported  consumption and drivers of variation. Prudential Group Scope 1 and 2 GHG emissions tCO2e 37,536 71,104 14,893 74,315 14,940 65,979 13,170 61,318 2015 2016 2017* 2018  Investment Estate  Occupied Estate * 2017 figures restated as revised data became  available from suppliers Prudential Group Scope 1 and 2 GHG Emissions We achieved a ranking of B in the 2018  CDP Climate Change disclosure  benchmark, and in ClimateWise, the  insurance sector climate initiative  managed by the Cambridge Institute for  Sustainability Leadership, we improved  our score, achieving 78 per cent (2017:  72 per cent). Our performance in  ClimateWise against six core principles  is independently audited by PwC. As a Group, we signed up to RE100 in  2018 to achieve 100 per cent renewable  electricity by 2025 across our occupied and  managed investment estates. 30 per cent  of our global electricity consumption is  procured from 100 per cent certified  renewable sources (solar PV and on-shore  wind). Our Group Scope 2 (market based)  emissions are independently assured by  Deloitte. Looking ahead, we will develop  roadmaps in 2019 for the demerged  businesses to set out strategies to achieve  this target, on a country-by-country basis.   As our business becomes increasingly  global, we recognise the importance of  understanding the impact of air travel on  our overall corporate carbon footprint.  We have collated air travel data internally  across all three regions for the first time.  We have elected to disclose Scope 3 GHG  emissions data from air travel for the UK  and Europe business unit. This amounted  to 21,622 tCO2e, representing a 50 per cent  increase over preliminary estimates (2017:  14,413 tCO2e). The scope of this data now  includes air travel from our sites in the UK,  Japan, Kenya, Poland and Zambia, which  are controlled by the UK and Europe  business unit. Our combined reported and unreported  carbon footprint from air travel is a  significant contribution to our overall  emissions. Therefore, as part of a holistic  approach to the management of our  climate impacts, we will focus management  effort on reducing the need for travel  through the deployment of digitally  enabled office working practices and  offsetting emissions from unavoidable  flights as final mitigation. Plans will be  developed in 2019 to establish a CO2  offsetting programme for air travel  emissions. As part of our ongoing environmental  management system (ISO 14001:2015) in  the UK, we achieved zero nonconformities  in 2018, and focused on improving  recycling rates and minimising single use  vending cups and plastics, as well as  completing the roll out of advanced energy  analytics software across our largest UK  properties following a successful trial.  In the US, Jackson completed a further  three Energy Star assessments in addition  to the two completed in 2017. The US  Environmental Protection Agency Energy  Star scheme is a certification programme  and performance benchmark identifying  the buildings nationwide that use  35 per cent less energy than typical  buildings. In Asia we have developed Green Design,  Construction and Leasing Guidelines, as  well as a smart leasing toolkit to ensure  good environmental performance of new  sites, focusing on energy and water  efficiency. M&G Real Estate, part of M&GPrudential,  has an approach to responsible property  investment that enables it to manage and  respond to the growing range of  environmental and social issues that can  impact property values. It continues to  decarbonise its property estate through  targeting low and no cost energy reduction  measures such as LED lighting installations,  real time monitoring of high energy users  through smart building technology and  realising energy efficiency through  refurbishment. Further details on M&G  Real Estate’s progress can be found in its  annual Responsible Property Investment  report at www.mandg.co.uk/institutions/ realestate/responsible-investing/ 76  Prudential plc  Annual Report 2018  www.prudential.co.uk Corporate responsibility review continuedEmissions source (tCO2e) Scope 1 Scope 2 – Location-based Occupied estate1 Investment properties Occupied estate1 Investment properties Scope 2 – Market-based (supplier and residual mix) Occupied estate1 Investment properties1 Group1 Occupied estate Investment estate Group Group Group1 Group1 Group1 Scope 3 Scope 1 and Scope 2* Total Scope 1 and 2* Total Scope 1, 2 and 3* Carbon intensity* kg CO2e per m2 – Scope 1 and 2 only kg CO2e per employee – Scope 1 and 2 only kg CO2e per m2 – Scope 1, 2 and 3 * Note that when reporting Group totals, the market-based emission is used. Data notes Reporting period:  Baseline year:  Independent Assurance:  2018 9,191 7,711 56,554 15,281 52,127 5,459 22,545 61,318 13,170 74,488 97,032 2017 % Change 10,494 7,703 61,154 18,751 55,484 7,237 15,306 65,979 14,940 80,919 96,225 -12% 0% -8% -19% -6% -25% +47% -7% -12% -8% +1% 2018 2017 % Change 24 3.1 32 29 3.2 34 -17% -3% -8% 1 October 2017 to 30 September 2018 1 October 2016 to 30 September 2017 Deloitte LLP has provided limited assurance over selected environmental  metrics in accordance with the International Auditing and Assurance  Standards Board’s (ISAE3000 (Revised)) international standard.  Consolidation (boundary) approach:  Operational Control Consistency with financial statements:   The reporting period does not correspond with the Directors’ Report period  (01 January 2018 to 31 December 2018) as it was brought forward by three  months to improve the availability of invoice data and reduce reliance on  estimated data.  Prudential owns assets, which are held on its balance sheet in the financial  statements, over which it does not have operational control. These are  excluded from the data below. Assets not included on the balance sheet  but held under an operating lease and where we have operational control  are included.  Emission factor:  Scope 1 and 3 reporting uses the UK DEFRA 2018 GHG Conversion Factors.  Accounting methodology:  Materiality threshold: Note 1  2017 figure restated as revised data became available from suppliers.  Scope 2 calculations use the IEA GHG 2018 Conversion Factors for location- based reporting. Market-based reporting uses supplier emission factors for  our UK REGO-backed supply and RE-DISS factors where available.  The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard Five per cent www.prudential.co.uk  Annual Report 2018  Prudential plc  77 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information People An inclusive working environment, where  we continually develop our talent, reward  great performance, protect our people and  value our differences, is key in delivering  outstanding results for our customers,  shareholders and communities. Diversity and inclusion Organisations benefit from a number of  diverse perspectives and experiences and  we consider this is important to our success  today and in the future. Diversity and  inclusion (D&I) is one of our strategic  objectives. Tim Rolfe, Group HR Director,  is the executive sponsor across the Group,  with Nic Nicandrou, Chief Executive of  Prudential Corporation Asia, acting as the  Board member accountable for D&I work.  The Group D&I Policy ensures we provide  equal opportunities to our workforce  through fostering an environment where  our current and prospective employees are  treated with dignity and respect, ensuring  an appropriate diversity of skill sets and  backgrounds to deliver success across the  Group. Our policy supports an inclusive  culture, where all our employees are  protected against discrimination and  provided with opportunities regardless of  their age, caring responsibilities, disability  status, ethnicity, gender, religion, sexual  orientation, professional, social, educational  or cultural background, or employment  contract type. Through our policy we  govern our business units to have effective  approaches in place to comply with local  regulation, provide equality of opportunity  and encourage our suppliers to promote  equality of opportunity. Each of our  businesses, including Group Head Office  (GHO), is required to report regularly to  Group HR on its compliance with the policy. Over time, we aspire to have a senior  management team that better represents  the experiences and backgrounds of our  customers and stakeholders. Diversity  contributes to Board effectiveness and is  essential for successfully delivering the  strategy of an international Group. Our  Board is committed to recruiting the best  available talent and appointing the most  appropriate candidate to each role. This  process ensures appropriate diversity of  experience, skill sets and professional  backgrounds. For more information on  diversity within our Board, please refer to  page 109 of the Governance section within  the Annual Report. We have a strategic, long-term approach  to D&I and the Board monitors progress  regularly through the Group D&I Advisory  Committee, including reviewing our  benchmarked progress against industry  advances on key aspects such as the  diversity of our Leadership Team. The  majority of D&I activity is managed by the  individual business units, which focus on  the priorities that make a key difference in  their specific markets, in alignment with the  Group-wide strategy. The articulation of  our D&I strategy has been updated in 2018  to reflect the evolution of our D&I journey.  Prudential Corporation Asia continued to  develop its D&I Works Committee, made  up of representatives from across its  regional businesses. Its purpose is to drive  the D&I strategies and initiatives in the  respective countries, provide support and  share best practices. In the US, Jackson has  introduced a D&I Advisory Council to  support senior leadership by helping guide,  implement and oversee D&I strategies and  initiatives, providing updates on progress  and communicating D&I efforts and  commitment internally and externally.  Across our businesses, our commitment  to all employees regarding D&I includes  making reasonable adjustments to those  with special requirements and is supported  by initiatives such as reviews of pay,  performance management consistency,  providing training to staff, engaging with  recruitment firms and awareness  campaigns to diversify the pool of potential  candidates. In 2018, building on the  unconscious bias leadership workshops for  senior managers and executives delivered  in 2017, we aimed to reach all employees via  the Group-wide roll-out of unconscious  bias e-learning. Completion rates exceeded  90 per cent throughout and positive  feedback was received from participants.  We again sponsored Dive In, the D&I  festival for insurance and the financial  services sector, which took place in 27  countries and 53 cities in the Americas,  Asia, Africa, the Middle East and Europe.  In 2018 we published two Group-wide D&I  newsletters for all employees on the themes  of mentoring and sponsorship and cultural  inclusion. The cultural inclusion newsletter  highlighted how our African businesses  reflect the cultural diversity of the countries  in which we operate through engaging with  clients in their native languages to improve  understanding of our products, helping us  to provide a better service. We are committed to improving the  diversity balance of our organisation. For  example, Prudential Corporation Asia  completed a review of recruitment  processes resulting in a clear commitment  to equal opportunities being incorporated  in all job adverts internally and externally  across Asia. Additionally, Prudential  Corporation Asia has committed to  increasing the focus on blind CV  assessment and gender balanced  short-lists. Our Group operations have  reported a measurable improvement in the  balance of gender, ethnicity, international  experience and sector background  experience in hires. The Group offers  tailored 1:1 maternity coaching for female  staff. This development initiative helps  mothers to prepare for maternity leave,  offers support while they are out of the  office, and aids and facilitates a successful  return to the workplace. Externally,  M&GPrudential achieved recognition from  D&I-related awards and rankings. Several  individuals were winners or shortlisted for  awards, for example the EMpower100  Ethnic Minority Executives List, the Black  Business Awards, Women in Investment  Awards and Top 50 Leading Lights,  Kindness and Leadership Awards. M&G  Investments was ranked in the top 50 of  the UK’s Social Mobility Employers Index.  In addition to the established affinity  networks – Prudential Women’s Network,  Pride (LGBT), CAN (cultural awareness)  and Mind Matters (mental health) – we  launched Enable (the Group-wide network  for employees with physical and mental  disabilities, allies, carers and champions)  and PruPride – the first LGBT and allies  network in Asia. We were part of the first  cohort of companies to sign the HM  Treasury Women in Finance Charter in  2016. In 2018, we achieved our  commitment to have 27 per cent of women  in senior management, a year ahead of the  target date of the end of 2019. We continue  to work towards the target of 30 per cent  women in senior management by the end  of 2021. See below for the gender  breakdown of our workforce for 2018. Talent development Development of our people is key to  our strategic objectives. Group Human  Resources focuses on senior leadership  through an annual talent review process.  We continue to develop leaders and critical  specialists for senior roles through  succession planning. We segment our  talent to identify short, medium and  long-term successors. Development of  our senior executive leaders is a bespoke  exercise that we base on their  requirements.  78  Prudential plc  Annual Report 2018  www.prudential.co.uk Corporate responsibility review continuedGender diversity: senior management 71% 75% Male Female 2018 2018 29% 2017 2017 25% 83% 2012 2012 17% Gender diversity: all employees Headcount Total Male Female Undisclosed2 Unspecified3 Chairman & Independent  Non-executive Directors Executive Directors Group Executive Committee (GEC) Includes Executive directors Senior managers Excludes the Chairman,  all directors and GEC    members Whole company1 Full time equivalent Includes the Chairman,  all directors, GEC members  and senior managers 10 6 11 8 6 11 2 0 0 79 56 23 – – – – – – – – 23,792 11,354 12,375 33.0 30.5 Notes 1  Excludes Prudential Corporation Asia joint venture. 2  In many of our businesses, we provide our employees with the option to not disclose their gender.   For these employees, gender is recorded as ‘undisclosed’. 3  No specification or information is captured on gender for an immaterial number of our employees.   These employees are recorded as ‘unspecified’.  We offer a range of programmes that  enable our people to grow and develop.  Most programmes are managed by our  business units. In 2018, 113 senior  high-potential individuals participated  in our established and well respected  Group-wide leadership development  programmes ‘Impact’ and ‘Agility’ and  the ‘Next Generation’ emerging talent  programme. These programmes were  developed in partnership with world- leading academic institutions and  co-delivered with business school thought  leaders. Across our businesses there are  many more examples of our continuing  commitment to talent development. For  example, in 2018 Prudential Corporation  Asia built on its strategic workforce  planning initiative to develop and upgrade  capabilities and reshape some critical roles  to ensure continued success. Prudential  Corporation Asia has implemented a senior  leadership behaviours framework, taking  a significant step towards creating a  purpose-led culture to help all employees  embrace the transformation of their  business. Jackson offers customised onsite  programmes, as well as access to an  online university, to meet the personal  and professional development needs of  employees with all levels of experience.  Development programmes have been  aligned to known enterprise-wide skills  gaps to further develop critical capabilities  for the future.  The Group continues to provide innovative  programmes designed in partnership with  top academic institutions and industry  experts, focused on early career  development, leadership development and  opportunities, to develop a strategic and  innovation mindset through varied career  experiences and projects. In 2018 the  Enhance programme incorporated several  new themes, notably collaboration,  including virtual and a new course  ‘Experiments at Work’, which encourages  expansive thinking in finding fresh  perspectives for repetitive challenges and  applying creative behaviours in everyday  situations.  M&GPrudential supports talent  development through a range of  programmes to increase personal and  organisational capability, alongside  bespoke development support for  individuals in key roles, including  leadership roles and critical specialists  such as fund managers, technologists  and actuaries.  Employee engagement We want to foster an environment in which  employees feel empowered and that they  are making an active contribution to the  organisation and the communities we  serve. We drive employee engagement  through a number of initiatives, including  colleague appreciation programmes,  wellbeing programmes, networking  opportunities with peers and senior  leaders across functions and employee  focus groups. Each of our businesses  manages its own activities in this area,  including employee engagement surveys,  regular employee open forums with senior  management and team away days to  discuss business performance. Our  businesses, including GHO, have  processes and, where appropriate, a policy  in place for engaging with employees. For  any significant issues that are likely to  impact either positively or negatively on  our reputation as an employer – at both  business and Group level immediate  reporting to Group HR is required.  Employee engagement in the context of the demerger We understand that during times of change  within organisations, colleagues can require  extra support and engagement. Since we  announced in March 2018 our intention to  demerge M&GPrudential from the Group,  we have embarked on a programme of  engagement to ensure that colleagues  are fully briefed on progress towards the  demerger and the expected shape of the  organisation afterwards. This has involved  town hall meetings with senior  management, smaller question-and-answer  sessions with leadership, regular updates  from senior management on progress, line  managers playing a key role in demerger- related communications and encouraging  colleagues to submit questions and  concerns, with a commitment to respond as  soon as practicable. The frequency of these  two-way communications is increasing  during 2019, as we move closer to the  demerger.  www.prudential.co.uk  Annual Report 2018  Prudential plc  79 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information      We appreciate that managing and  supporting our people through such a  period of change is vital in ensuring that  they remain engaged with the business,  and we also recognise the value of the  culture that we have built up in the business  and are taking steps to ensure that culture  is protected during the process of the  demerger. Throughout our  communications we have been stressing  the importance of partnership, stewardship  and ownership, key elements of our  culture, and we are doing everything we  can to ensure that our colleagues are aware  that they have a stake in the future success  of the demerged businesses. Data protection and cyber security For all businesses, the theft of large  quantities of personal data has become  increasingly common, at significant cost to  consumers and businesses. For us, as for  many other businesses, the impact of such  events has the potential to be more severe  in the future as our business changes and  becomes increasingly digital. These types  of incidents also have the potential to  significantly impact on the continuity of our  business, our customer relationships and  our brand reputation, as well as to diminish  customers’ trust in engaging digitally with  us and all businesses. The knock-on effect  of this could be that many of the social  benefits of new technology, such as  enabling financial inclusion and greater  access to primary healthcare, may not be  realised. In this context, cyber risk remains  a prominent concern and focus area for  ourselves, regulators and businesses  globally.  Our cyber strategy was rolled out during  2018, providing increased insight into our  Group-wide information security  performance. The strategy is designed to  deliver against three objectives: to protect  the business, comply with applicable laws  and regulations, and support the growth  of the business. A number of work streams  underpin the delivery of the strategy,  covering risk prevention, the Group-wide  baseline of security controls and capability,  and promoting resilience. This supports  the business to prioritise and make  informed, risk-based decisions. These  benefits will continue to be delivered  throughout 2019, as the strategy matures  under the new Group Chief Information  Security Officer. A key element to managing cyber risk and  strategies is to have good information,  which our executives and other  stakeholders across the business use to  make good decisions. During the course  of 2018, 18 reports on topics such as the  current performance of cyber security  capabilities across the Group and the  lessons learned from industry events have  been provided to various executive  committees including the Group Executive  Committee and the Group Risk Committee.  Using a newly developed set of Group- wide cyber key performance indicators  (KPIs) that map to international standards  such as National Institute of Standards and  Technology (NIST), senior executives are  provided with a monthly update from  Group-wide Information Security  regarding the Group’s cyber performance  in key areas of cyber risk management. Our  Group-wide cyber KPIs track a broad range  of security domains on a monthly basis,  including infrastructure oversight, asset  management, incident response,  awareness and compliance. An annual  in-depth, evidence-based analysis of our  Group-wide cyber capabilities, aligning to  international standards was also  completed. This information is brought  together and further augmented by regular  threat update papers and a benchmarking  of ourselves against our peers across the  globe to facilitate timely decision-making  by senior business leaders across the  Group. The analysis we conduct and the  KPIs we gather are kept under constant  review to ensure that they remain aligned  to the business and that they continue to  facilitate business decision-making and  thus reduce cyber risk. Throughout the  year, Board members, including non- executives, have received one-to-one  training on cyber threats, including privacy,  by a senior manager of the Group-wide  Information Security team.  The Group-wide cyber assurance  programme, which is based on standards  like the NIST Cyber Security Framework,  became operational in 2018. It has  provided valuable insights regarding our  capabilities and performance in the way we  manage cyber risk across the business. The  information and analysis provided by the  Group-wide Oversight and Assurance  team has been used in a number of ways to  inform our cyber security-related choices.  For example, it is used to provide senior  executives with assurance that our cyber  risk is being appropriately managed, while  business unit leaders have used the insight  to make better-informed and targeted  investment decisions.  The programme continues to evolve to  ensure that the way we manage cyber risk  remains effective and includes all three  elements of cyber risk management –  people, processes and technology.  This is vital as changes to our business,  the technologies we use and our operating  environment continue to gather pace. For  example, throughout 2018, we continually  reviewed and made adjustments where  necessary to our KPIs. This is to ensure that  they provide appropriate oversight and  cover areas of cyber risk that may have  been introduced as a consequence of new  technologies. Similarly, we continue to  identify, adjust and review the cyber  capabilities we need. The Group-wide  policies and standards for information and  cyber security, which were refreshed in 2018  to reflect the rapid advance in cyber threats,  have been introduced and will be reviewed  annually and adjusted where necessary to  reflect a changing operational environment.  The Group has an established Cyber  Threat Intelligence team that assists our  businesses with understanding the cyber  threats we face and provides guidance on  how to protect and mitigate against these  threats. We believe that knowledge sharing  across our businesses is key to a mature  intelligence function and we use a variety  of mechanisms, including a Group-wide  threat intelligence-sharing platform and  weekly telephone conferences with  representatives of business security teams,  to ensure timely visibility and dissemination  of intelligence to proactively defend the  business. In the last year, we have further  enhanced our collaboration tools and  launched a weekly threat bulletin to  provide situational awareness to a wider  audience in information security. Looking ahead to 2019 and recognising  that the threat landscape will continue  to evolve, we will continue to evolve and  strengthen our cyber defences and  management of cyber risk. To maximise  effectiveness and efficiencies we are  looking to establish global cyber centres  of excellence. We will be exploring new  machine learning and augmented  intelligence technologies to identify if they  can be used Group-wide to enhance and/ or improve our understanding and  management of cyber risk. Communities We take an active approach to managing  ESG-related risks and tackling  environmental and social challenges.  Our strong contribution, harnessing the  commitment of our people, continues to  improve lives and build communities,  wherever we work.  Our community investment strategy is  closely aligned with our business purpose  80  Prudential plc  Annual Report 2018  www.prudential.co.uk Corporate responsibility review continuedCha-Ching financial literacy programme Prudential colleagues collaborated  with Junior Achievement Kenya to  provide financial literacy skills to children  aged seven to 11 years using Cha-Ching  education materials. Volunteers acted as student mentors and  shared their experiences of dealing with  money, using the Cha-Ching concepts of  Earn, Save, Spend and Donate. The  programme culminated in a graduation  ceremony, which provided a platform  for pupils from different schools to come  together and test their knowledge  through a series of fun and engaging  financial literacy games and challenges. and with our stakeholders’ concerns and  interests, focused on four principal themes:  — Social inclusion;  — Education and life skills;   — Disaster preparedness; and  — Employee engagement. We establish long-term relationships with  our charity partners to ensure that the  projects we support are sustainable, and  we work closely with them to ensure that  our programmes continuously improve.  Education and life skills Cha-Ching – the first global financial education programme Developed by Prudential to address  financial illiteracy, Cha-Ching is a global  financial responsibility and education  platform. Now in its eighth year, the  programme is aimed at primary school-age  children and has expanded from its origins  in Asia to each of the four continents where  the Group does business. In all the markets  where it has been launched it has been  very positively received, with strong  feedback from parents, teachers, children  and political stakeholders.  In Asia, the  programme reaches over 34 million  households a day through a multi- distribution platform including Cartoon  Network Asia, and through its own  standardised curriculum and school  contact programme, has reached more  than 400,000 children so far. The  curriculum developed in partnership with  Junior Achievement has continued to be  well received during 2018 and rolled out  to a further 180,000 students in Indonesia,  the Philippines, Malaysia and Thailand.  In the US, the Jackson Charitable  Foundation has brought Cha-Ching to  more than 2.7 million elementary school  students since 2017 through partnerships  with Junior Achievement USA and  Discovery Education. The Cha-Ching  videos and lessons have been integrated  into Junior Achievement’s third grade  classroom programme. Each year, schools  across the country have the chance to win  US$10,000 to increase financial education  at their school and US$1,000 to donate to  a charity of their choice through the  Cha-Ching Money Smart Kids Pledge  Challenge in the US. In the UK, working with Young Enterprise,  we have developed an online educational  resource for primary school students in  England and Wales that has enabled the  Cha-Ching programme to be brought into  the classroom. The Quality Marked  teaching resource is linked to the Personal  Finance Education Group’s Financial  Education Framework and has guidance  for teachers on how most effectively to  integrate activities into their teaching, as  well as activities for home-learning. Since  launch in late 2016, the resource has been  downloaded 28,478 times in 1,179 schools  across the UK.  In other markets, the online educational  resource has also been utilised to support  the roll-out of the Cha-Ching programme  across our African markets as part of a  financial literacy campaign, delivered  jointly by Junior Achievement Africa and  Prudential Africa employees. Cha-Ching  was launched in Poland in 2015 and the  first 10 films were translated into Polish  and aired on several children’s television  channels. A website with materials for  children and teachers was created to  share in local schools. First Read – investing in early childhood development Prudence Foundation has funded and  supported the First Read programme since  2013, partnering with Save the Children to  focus on investing in early childhood care  and development in Cambodia and the  Philippines. First Read helps parents to  develop their children’s numeracy and  literacy skills by providing books in the  local language or dialect, and encouraging  them to read, sing and count together.  It also helps parents understand the  importance of healthy and nutritious food  for children’s development. Since 2013,  more than 300,000 children aged up to six  and their parents have benefited through  this home-based early childhood  development programme, while over  700,000 people have also benefited  indirectly through shared knowledge  and resources.  A new three-year partnership formed  with the China Development Research  Foundation will comprise two programmes,  focusing on rural education and child  health; and on nutrition improvement.  Both programmes are aligned with the  strategic development focus of the Chinese  national government and will be delivered  in rural China. www.prudential.co.uk  Annual Report 2018  Prudential plc  81 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationEmployee volunteering Jackson’s charitable efforts are focused  on strengthening families and  increasing economic opportunities in  the communities we call home. Our  employees work together for a common  cause, which helps them build stronger  bonds and valuable skills.  Jackson employees volunteer with  Chicago Youth Programmes throughout  the year, mentoring students from  under-resourced neighbourhoods,  serving as important role models and  creating a safe space for students to  grow, learn and have fun.  Jackson Charitable Foundation teams up with Ramsey Education In 2018, in addition to Cha-Ching, Jackson  Charitable Foundation sponsored Ramsey  Education’s Foundations in Personal Finance curriculum in 250 high schools  across the country. The Foundation,  which has a mission to advance financial  knowledge on a national scale, has teamed  up with Ramsey Education to ensure that  more than 20,000 high school students  have access to this critical, financial  education programme that teaches  valuable skills to prepare them for a life of  financial freedom. More than three million  students have benefited from Foundations  in Personal Finance in middle schools,  high schools and universities nationwide.  Foundations in Personal Finance can  be used as a primary resource to fulfil  requirements in mathematics, economics,  family consumer science, business  mathematics and personal finance.  Educators who use this programme see  their students build confidence, security  and hope. They share stories of students  going to college debt-free, paying cash for  their first car, or even helping their parents  learn about the importance of an  emergency fund.  Secondary school scholarships across Africa In our markets in Africa we have committed  to provide support for academically able  but financially disadvantaged high school  students, and to help build capacity for  training in actuarial sciences at local  universities. Prudential has worked with  several charities operating in Ghana,  Kenya, Uganda and Zambia to deliver the  Prudential Scholarship Programme with  the aim of improving quality and access to  education for all, and ensuring that  everyone marginalised by society receives  education, skills and support towards  employability. The Prudential Scholarship  Programme has supported more than  7,000 academically able but financially  disadvantaged high school students to  complete their secondary education over  either four or five years of high school.  This has included financial bursaries to  cover the cost of school fees and boarding  fees where necessary, uniforms and  books, as well as a programme to upgrade  conditions to increase attendance at three  schools in Uganda. Nashville associates further financial education with Junior Achievement Career Exploration Centre Jackson and its employees donated more  than US$150,000 to sponsor the Jackson  Career Exploration Center at the brand- new Junior Achievement Finance Park in  Middle Tennessee. The interactive  personal finance facility will reach older  students with a hands-on experiential  budgeting simulation facility where  students convene for 13 teacher-led  lessons. The hands-on experience helps  students build a foundation to make smart  financial decisions related to income,  expenses, savings and understanding  credit. Supporting young people with employability and financial skills M&GPrudential is a partner member  of the KickStart Money primary financial  education programme. The programme  aims to reach 20,000 primary school  children and focuses on saving, budgeting,  careers, borrowing and consumer and  public finance.  Through three secondary school  partnerships in Paddington, Reading and  Stirling, M&GPrudential has also been  directly involved in building the knowledge  and skills of young people. These  partnerships have supported over  4,100 young people since 2013, with  370 employees giving their time and  sharing their knowledge and skills. 82  Prudential plc  Annual Report 2018  www.prudential.co.uk Corporate responsibility review continuedVolunteering to support communities in need During 2018, Prudence Foundation formed  a partnership with Habitat for Humanity  to implement a regional volunteering  programme that supports communities  in need, complementing the volunteer  support we provide when appropriate  during disaster recovery. In April 2018,  over 70 volunteers from across the region  spent one week in Yogyakarta, Indonesia,  helping to build homes for those in need  and an early childhood development  centre. In November 2018, the Foundation  led another group of more than 80 regional  volunteers to Siem Reap in Cambodia to  build houses for families desperate for new  homes and support the refurbishment  of a primary school. During 2018 the  Foundation provided support to help  with relief and recovery efforts in Taiwan  (following the Hualien earthquake) and  Laos (following the flooding). In 2019,  we will also be supporting longer-term  recovery in Lombok and Sulawesi,  Indonesia which were both severely  affected by natural disasters in 2018. Disaster readiness and relief Helping to make Asia more prepared and safer Safe Steps is a first-of-its-kind, in terms  of reach and breadth of partnerships,  pan-Asian public service initiative to  enhance awareness through the  dissemination of educational survival tips  for natural disasters, road safety and first  aid. The programme was created and  developed by Prudence Foundation in  partnership with National Geographic and  the International Federation of Red Cross  and Red Crescent Societies. It is a  multi-platform programme including on-air  video messages and informative website  and educational collateral that can be  shared among communities. At its core,  Safe Steps utilises one-minute videos to  provide simple to understand messages on  how to be prepared and stay safe in three  areas that cause unnecessary loss of life:  natural disasters (launched 2014), road  safety (2016) and first aid (2017).  The programme continues to reach an  estimated 250 million people every day  across Asia, through partnerships with  government, humanitarian and private  sector organisations. In 2018, new  partnerships were formed in Cambodia,  Hong Kong, the Philippines, Singapore  and Vietnam. For example, Prudence  Foundation and Prudential Singapore  embarked on a new partnership with the  Singapore Red Cross Society, focusing  on a mass community first aid training  programme aimed at the younger  demographic.  Safe Schools programme Asia Pacific is the world’s most disaster- prone region, and the Prudence  Foundation continues to focus on disaster  preparedness, relief and recovery in our  Asia markets. Prudence Foundation works  with the humanitarian, government and  private sector to help communities better  prepare for such disasters before they  strike, as well as providing support at times  of emergency response and recovery.  During 2018, Prudence Foundation  continued to support the Safe Schools  programme, partnering with Plan  International and Save the Children in  Cambodia, Indonesia, the Philippines,  Thailand and Vietnam. The programme  focuses on capacity-building for students,  teachers and local community members  on disaster preparedness. Since 2013,  more than 85,000 students and 40,000  adults have participated.  In 2018, the Foundation formed a new  partnership with Save the Children and  the Philippines’ Department of Education  to implement a nationwide focused  programme. The three-year programme  will aim to develop a disaster risk reduction  management information system, together  with training and capacity building of  teachers and local government officials.  This innovative new approach to Safe  Schools aims to ensure that every school in  the Philippines will be able to benefit from  the Safe Schools programme, providing the  Department of Education with the  information to help allocate its resources  and expertise to support the ongoing  implementation of the global and ASEAN  Comprehensive Safe Schools framework. Safe Steps Safe Steps is a pan-Asian public service  initiative to enhance awareness through  the dissemination of educational  survival tips for natural disasters, road  safety and first aid. The programme was  created and developed by Prudence  Foundation in partnership with National  Geographic and the International  Federation of Red Cross and Red  Crescent Societies. Prudence  Foundation and Prudential Singapore  embarked on a new partnership with  the Singapore Red Cross Society in  2018, with a mass community first aid  training programme aimed at younger  people. www.prudential.co.uk  Annual Report 2018  Prudential plc  83 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationPruGOals As part of our nationwide commitment  to social inclusion in the UK, Prudential  has developed the PruGOals programme  in partnership with our four charity  partners: Teach First, Transformation  Trust, Greenhouse Sports and the Dame  Kelly Holmes Trust.  PruGOals aims to empower young  people to achieve their goals, focusing  on building confidence, raising  aspirations and increasing self-esteem.  The core programme takes the riders on  a journey of commitment, endurance,  training and fitness, and culminates in  taking on the Prudential RideLondon- Surrey 46. Working with purpose In partnership with RVS we launched our  ‘Bring People Together’ campaign, which  seeks to encourage and empower more  people to volunteer, particularly those  aged 50 to 65. Specifically its aim is to  inspire them to start their own activities or  clubs for older people with the backing of  RVS. From social activities and hobby  classes to running a lunch club or providing  companionship to older people in their  homes, together we want to harness  the get-up-and-go of pre-retirees by  encouraging them to put their talents  and life experience to valuable use by  becoming volunteer co-ordinators. The  programme aims to support the creation of  150 new groups and recruit 500 volunteer  co-ordinators to lead them. Emergency fund relief Prudential has been a Group-level  supporter of Save the Children since 2010  and is one of the Children’s Emergency  Fund’s major supporters. This allows us to  act swiftly when disasters occur in any of  our markets and provides an instant,  effective fundraising mechanism for  employees when needed. In 2018 Save  the Children’s emergency fund was used  93 times across 35 countries, and helped  to reach over 2.1 million people affected  by emergencies with life-saving support.  Social inclusion Commitment to social inclusion in the UK through Prudential RideLondon Prudential RideLondon has established  itself as a major mass-participation and  charity fundraising event in the UK, and  in the past six years, has raised more than  £66 million for charity. In 2018 it raised  more than £13 million for charity to set  a European record for a cycling event,  beating the previous year’s record of  £12.75 million. There was a sharp rise in the  number of participants riding for charity –  55 per cent, up from 44 per cent in 2017.  More than 900 charities have benefited.  Prudential has sponsored the event since  inception in 2013 and our own community  engagement partnership, PruGOals,  supported 420 16 to 18-year olds from  41 schools across the UK to improve their  self-esteem, aspiration and educational  outcomes. The PruGOals programme  helps young people to achieve their goals  regardless of social or economic  background by providing aspirational  challenges, culminating in taking on the  Prudential RideLondon-Surrey 46. The  2018 post-event evaluation report from the  charity Teach First reveals that students’  ‘resilience’ and ‘determination’ rose by  a third after completing the programme. Enhancing later life M&GPrudential’s partnership with Royal  Voluntary Service (RVS) continues with  First Time for Everything. This programme  aims to tackle loneliness and social isolation  by encouraging 2,700 older people across  the UK to stay active, engaged and  connected to their community in 2018.  Prudential has also continued to fund the  Later Life Links programme with Age UK,  providing long-term companionship,  advice and practical help to older people.  Running in six UK communities, the  programme supported over 4,900 older  people in 2018 through telephone and  face-to-face support.  84  Prudential plc  Annual Report 2018  www.prudential.co.uk Corporate responsibility review continuedCharitable donations We calculate our community investment  spend using the internationally recognised  London Benchmarking Group (LBG)  standard. This includes cash donations  to registered charitable organisations,  as well as a cash equivalent for in-kind  contributions. In 2018, the Group spent £27.3 million  supporting community activities. The  direct cash donations to charitable  organisations amounted to £19.6 million,  of which approximately £4.4 million came  from our UK and Europe operations. The  remaining £15.2 million was contributed to  charitable organisations by Jackson and  Prudential Corporation Asia. The cash contribution to charitable  organisations from our UK and Europe  operations is broken down as follows:  education £2,337,000; social, welfare  and environment £1,995,000 and  cultural £64,000. The balance includes in-kind donations  as set out on the Group website at   www.prudential.co.uk/responsibility/ standards prepared in accordance with  LBG guidelines. This included 11,710  employees who dedicated 117,491 hours  of volunteer service in their communities.  Furthermore, £479,633 was donated  across the Group by our employees  through our payroll giving scheme. Political donations It is the Group’s policy neither to make  donations to political parties nor to incur  political expenditure, within the meaning  of those expressions as defined in the  UK Political Parties, Elections and  Referendums Act 2000. The Group did not  make any such donations or incur any such  expenditure in 2018. Apprenticeships in the UK Youth unemployment remains a growing  problem in the UK and M&GPrudential  continues to help to shape future job  prospects for young people.  M&GPrudential’s asset management and  insurance businesses have run successful  apprenticeship programmes for the last  seven years, gaining recognition and  awards for the success of the schemes.  Over 300 apprentices have been through  both programmes and over two-thirds of  those who completed the programme  secured ongoing employment with the  business, while others chose to work  elsewhere or moved on to higher  education. In 2018, 15 Prudential UK  apprentices joined the programmes, with  an increased emphasis on recruitment from  diverse backgrounds. All Prudential UK  apprentices are on fixed-term contracts,  with the exception of two graduate  apprentices who are on permanent  contracts. All M&G apprentices are offered  permanent positions from the outset and  UCAS points have been removed from  graduate/internship applications to try and  reach those from a low socio-economic  background who may not have excelled at  school but have done so at university.  CVs have also been removed from the  face-to-face interview stage, so that  assessors are able to assess purely on  potential, rather than being influenced by  a candidate’s background or experience. Support for disadvantaged communities M&GPrudential also continues to support  disadvantaged communities near our  offices and during 2018 over 200 charities  received support either by donation or  employee volunteering. The range of areas  which received support is extensive and  includes projects that relate to education,  arts and heritage, children and youth, the  environment, medical research and social  and welfare matters. M&GPrudential  continues to support many aspects of  education and provides several on-site  educational days for students at our  London headquarters. M&GPrudential  continued its support of City Giving Week  with an on-site event which each day  showcased several charities that have  received support and highlighted the  services they provide. The Lord Mayor of  the City of London attended M&G’s event  as part of his initiative to promote the  varied charitable activities undertaken  by City businesses. M&GPrudential continues to use its  sponsorship of the RHS Chelsea Flower  Show to support social issues through RHS  outreach programmes including Greening  Grey Britain, It’s Your Neighbourhood and  the RHS Campaign for School Gardening  across the UK. Employee volunteering Successful volunteering programme – Chairman’s Challenge Many of our employees play an active role  in their communities through volunteering,  charitable donations and fundraising. In the  UK and Europe, the US and Asia we offer  our employees the opportunity to support  charities through payroll giving.  Chairman’s Challenge is our flagship  international volunteering programme,  bringing together people from across  the Group to help in their communities.  Colleagues from across the Group give  their time and skills to support our global  charity partners, including Plan  International, Help Age International  and Junior Achievement. The programme continues to appeal to  colleagues, with the number of volunteers  signing up increasing year-on-year. Last  year 9,054 colleagues from around the  world took part, volunteering over 49,000  hours to support 33 projects.  Each volunteering project focuses on one  or more of our CR priorities and allows us  to support both large, well established  charities and innovative, smaller-scale  activities with volunteers as well as  financial support. Prudential donates £150  to our charity partners for every employee  who registers for the programme. Charity  partners use this money to seed-fund  charitable projects for Prudential  volunteers. Each year, employees across  the Group are involved in the voting  process to decide on the most innovative  projects, which receive extra funding  towards their charitable objectives. Volunteering across the Group As well as volunteering efforts on behalf  of the Chairman’s Challenge, employees  around the Group volunteered on a huge  range of other charitable projects, from  providing relief following disasters to  mentoring schoolchildren, supporting the  elderly and skills-sharing. We recognise  that employee volunteering brings benefit  not only to the charities but also to the  development of our people, and we  actively encourage colleagues to  participate in our programmes. www.prudential.co.uk  Annual Report 2018  Prudential plc  85 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationCode of Business Conduct Consideration of environmental, social  and community matters is integrated in our  Code of Business Conduct. Our code is  reviewed by the Board on an annual basis.  Refer to page 72 for more information.  Risk assessment For more information on the risks facing  our business, see the Group Chief Risk  Officer’s report on page 52. Further  information on how we manage our  material ESG issues and associated risks  are provided in the ‘Managing our material  ESG issues’ section of the Corporate  responsibility review on page 71. Accountability and governance for corporate responsibility The Board The Board regularly reviews the Group’s  corporate responsibility performance and  scrutinises and approves the Group  corporate responsibility report and  strategy on an annual basis. Local governance We believe that corporate responsibility is  best managed on the ground by our people  running the businesses. In M&GPrudential  and Jackson there are governance  committees in place – with senior  management representation – that agree  strategy and spend. In Asia, the Prudence  Foundation has been established as a  unified charitable platform to align and  maximise the impact of community efforts  across the region. The Prudence  Foundation is governed by a statutory  Board of Directors, under which a Board  of Trustees operates as a decision-making  forum, directing the management of the  programmes in collaboration with our local  markets, and ensuring that we maximise  the value of our spend to local  communities. The Material Subsidiary  Boards oversee the business unit corporate  responsibility initiatives. All business units  submit comprehensive Board reports  to the Subsidiary Board and to the  Prudential plc Board annually providing  detailed information on major strategic  initiatives.  Strategic report approval by the Board of Directors The Strategic report set out on pages  9 to 86 is approved by the Board of  Directors. Signed on behalf of the  Board of Directors Mike Wells Group Chief Executive  12 March 2019 86  Prudential plc  Annual Report 2018  www.prudential.co.uk Corporate responsibility review continued03 Governance Chairman’s introduction Board of Directors How we operate Risk management and internal control Committee reports Nomination&GovernanceCommitteereport AuditCommitteereport RiskCommitteereport Statutory and regulatory disclosures Index to principal Directors’ report disclosures Page 88 89 95 107 109 109 115 124 128 130 www.prudential.co.uk AnnualReport2018 Prudential plc 87 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationChairman’s introduction Robust and transparent governance supporting the delivery of our strategy Dear Shareholder Goodgovernanceencouragesdecisions tobemadeinawaythatismostlikelyto promotethesuccessoftheCompanyforthe benefitofitsmembers,takingintoaccount theviewsandinterestoftheGroup’swider stakeholders.Weaimtoachievethisthrough agovernanceframeworkthatsupports decision-making,iscontinuouslyupdated tomeettheGroup’sbusinessneeds,makes roomforchallengeandencompassesa prudentsystemofinternalcontrolsand processesforidentifying,managingand mitigatingkeyrisks. Setoutbelowaresomeofthekeystrategic andgovernanceitemstheBoardhas consideredover2018. Demerger Followingtheannouncementin2017ofthe combinationofourassetmanager,M&G, andPrudentialUK&Europetoform M&GPrudential,earlyin2018theBoard announcedtheintentiontodemerge M&GPrudentialfromtheremainderofthe PrudentialGroup.DuringtheyeartheBoard hasthereforebeenfocusedontheexecution ofthatdecision. Inpreparationforthismajortransaction,the Boardlookedatitswaysofworkingatthe endof2017throughourannualeffectiveness review.Thefeedbackfromthatreviewwas usedtoensurethattherightenvironmentfor criticaldecision-makingcontinuedtobein place,andthishasprovedveryhelpfuland effectivegroundworkastheBoardwas askedtoconsideranumberofdemerger- relateditemsthroughtheyear. Inrelationtothegovernanceofboththe PrudentialandtheM&GPrudentialGroups, workhasbeenundertakentohelpensure asmoothtransitionandensurethatboth Groupshaveboardsproperlycomposedto meettheirfuturestrategicneeds.Most importantlythishasincludedestablishing aseparateM&GPrudentialboardandthe appointmentofthefirstindependent non-executivedirector,MikeEvans, aschairmanofthatboard. Furtherinformationaboutthedemerger issetoutintheStrategicreport. Culture and values TheBoardspenttimein2018focusingon Prudential’sculture,recognisingthatitis animportantcontributortotheGroup’s successandsustainablegrowthandthe Boardmadefurtherprogressonconsidering howourGroup’scultureisarticulated, communicated,rewardedandrecognised. Inlightoftheupcomingdemerger,the Group’sculturehastakenonextra significanceaswenavigatethroughaperiod ofchange.Itisoneofourobjectivestoensure thattheGroupcontinuestobeguidedbyits valuesandbehavioursanddemonstrates ongoingcommitmenttoourstakeholders andtoinnovation,performanceand excellenceinexecution. TheBoardapprovedchangestoitsterms ofreferencein2018tomakeexplicit referencetoitsroleinestablishingthe Group’spurpose,valuesandstrategy. Looking after our stakeholders and wider community initiatives AtPrudential,werecognisethatour stakeholdersarekeytoourlong-termsuccess. Weseektoengageproactivelywiththem,to understandtheirviewsandtotakethese viewsintoaccountwhenmakingdecisions. TheBoardiscognisantoftheemphasisthat thenewCorporateGovernanceCodeputs onstakeholdersmorebroadlythan shareholders.TheBoardconsideredthis intwoseparatemeetingsduringtheyear andisdevelopingmechanismstoensure stakeholderviews,andinparticularthe employeevoice,maketheirwaytoBoard levelinaneffectiveway. Iremainimmenselyproudofourinternational volunteeringprogramme,theChairman’s Challenge,whichcontinuestogrowwith over9,000colleagueshavinggiven49,000 hourstosupportingthecommunityin2018. Youcanreadmoreaboutourcorporate socialresponsibilityactionsinthecorporate responsibilityreviewonpages70to86 andinour2018ESGreportwhichwillbe publishedonourwebsiteinMay2019. Succession planning and Board composition changes IthasbeenaprivilegetoserveontheBoard ofPrudentialplcsinceOctober2010andto haveservedasChairmansinceJuly2012. IandmyfellowmembersoftheNomination &GovernanceCommitteeagreethatitis importantthatleadershipoftheBoardis refreshedappropriatelyandthatsuccession planningformyroleasChairmantakesplace inanopenandtransparentway. OurSeniorIndependentDirector, MrRemnant,hasthereforebeenconsulting withmajorshareholdersonmytenure extendingtoMay2021,subjecttore- electioneachyear.Wearemindfulofthe provisionsoftheCorporateGovernance Codewhichstatethatachairshouldnot remaininpostbeyondnineyearsfrom thedateoffirstappointmenttotheboard, whichinmycasewouldbeOctober2019. However,giventheGroup’splanned demergeroftheM&GPrudentialbusiness, andinlightoftheshareholdersupportwe havereceivedtheBoardhasconsidered andconfirmedthatitbelievesittobein shareholders’bestinterestsformeto continuetoserveintheChairroleinorderto overseetheBoardduringthistimeofchange andensurethatthePrudentialGroupis stronglyestablishedinitspost-demerger state.Iamfullycommittedtothischallenge. Furtherdetailsoftheagreedtimeframefor mydepartureandplansforidentifyingand appointingasuccessoraresetoutinareport fromMrRemnant,aspartoftheNomination &GovernanceCommitteereporton page111.TheCommittee’sreportincludes adescriptionoftheGroup’sapproachto successionplanningmorewidely. LordTurnerhasannouncedthathewillretire fromtheBoardatthe2019AnnualGeneral Meeting.Iwanttothankhimforhis significantcontributiontotheBoardoverthe lastthreeandahalfyears,asaNon-executive DirectorandmemberoftheRiskCommittee. WehavealsolookedatourBoard compositionaspartofourprogresstowards demerger.AsChiefExecutiveof M&GPrudential,MrFoleywillnaturallystand downfromtheBoardaspartofthedemerger transition.Havingtakenintoaccountthe changedshapeofthePrudentialGroup post-demergerandthereducednumber ofbusinessunits,theBoardhastakena decisionthattherolesofChiefExecutive PrudentialCorporationAsiaandChief ExecutiveOfficerofJacksonHoldingsLLC willnolongerbeExecutiveDirectorroleson theBoard,althoughwillcontinuetoserve ontheGroupExecutiveCommittee.As announcedtothemarketon28February 2019alloftheseBoardchangeswilltake effectfromtheconclusionofour2019 AnnualGeneralMeeting.Mythanksgoto MrFoley,MrNicandrouandMrFalconfor theirservice. IwouldalsoliketothankMsRichardsand MrStowe,asExecutiveDirectorshaving steppeddownduring2018,fortheirvaluable contributionstotheBoardandtotheGroup duringtheyear. Ihopethatthisreportandthereportsofmy fellowCommitteeChairswilldemonstrateto youtheworkwehaveundertakenoverthe courseoftheyearaswellasthetangibleand positiveimpactthishashadonourbusiness. Paul Manduca Chairman 88 Prudential plc AnnualReport2018 www.prudential.co.uk Board of Directors Chairman Key to Committee membership  Chair  Audit Chair Audit N&G  Nomination&Governance Rem  Remuneration Risk  Risk Relevant skills and experience Paulwillcontinuetodrawonhisextensive experienceinleadershiprolesandhisknowledge oftheGroup’scorebusinesses,international marketsandindustrysectors,andhistechnical knowledge,toprovideeffectiveleadership duringaperiodofchangefortheGroup. Paulhasheldanumberofseniorleadership roles.Notableappointmentsincludeserving aschairmanoftheAssociationofInvestment Companies(1991to1993),actingasfounding CEOofThreadneedleAssetManagement Limited(1994to1999),globalCEOofRothschild AssetManagement(1999to2002),directorships ofEagleStarandAlliedDunbar,holdingthe officesofEuropeanCEOofDeutscheAsset Management(2002to2005),chairmanof BridgewellGroupplcandadirectorofHenderson SmallerCompaniesInvestmentTrustplc. Otherpreviousappointmentsincludethe chairmanshipofAonUKLimitedandJPM EuropeanSmallerCompaniesInvestment TrustPlc.FromSeptember2005untilMarch 2011,Paulwasanon-executivedirectorof WmMorrisonSupermarketsPlc,includingas seniorindependentdirector,auditcommittee chairmanandremunerationcommittee chairman.Hewasanon-executivedirectorand auditcommitteechairmanofKazMunaiGas Exploration&Productionuntiltheendof September2012andchairmanofHenderson DiversifiedIncomeLimiteduntilJuly2017. PaulinitiallyjoinedtheBoardinOctober2010as theSeniorIndependentDirectorandmemberof theAuditandRemunerationCommittees,roles hehelduntilhisappointmentasChairmanin July2012.OnbecomingChairman,Paulwas alsoappointedChairoftheNomination& GovernanceCommittee,havingbeenamember oftheCommitteesinceJanuary2011. Other appointments — RateSetter(RetailMoneyMarketLimited) (chairman) — TempletonEmergingMarketsInvestment Trust(TEMIT)(chairman) — SecuritiesInstitute — TheCityUKAdvisoryCouncil(chairman) Relevant skills and experience Mikecontinuestodeveloptheoperational managementoftheGrouponbehalfofthe Board,implementingBoarddecisionsand leadingtheExecutiveDirectorsandsenior executivesinthemanagementofallaspects oftheday-to-daybusinessoftheGroup. Mikehasmorethanthreedecades’experience ininsuranceandretirementservices,having startedhiscareerattheUSbrokeragehouse DeanWitter,beforegoingontobecome amanagingdirectoratSmithBarneyShearson. MikejoinedthePrudentialGroupin1995 andbecameChiefOperatingOfficerand Vice-ChairmanofJacksonin2003.In2011,he wasappointedPresidentandChiefExecutive OfficerofJackson,andjoinedtheBoard ofPrudential. DuringhisleadershipofJackson,Mikewas responsibleforthedevelopmentofJackson’s market-leadingrangeofretirementsolutions. HewasalsopartoftheJacksonteamsthat purchasedandsuccessfullyintegratedasavings instituteandtwolifecompanies. MikejoinedtheBoardin2011andwas appointedGroupChiefExecutiveinJune2015. Other appointments — InternationalAdvisoryPanelofthe MonetaryAuthorityofSingapore — SanDiegoUniversityAdvisoryBoard Executive Directors MrTurnerjoinedtheBoardasanExecutive DirectorandGroupChiefRiskOfficerwith effectfrom1March2018. MsRichardssteppeddownasChiefExecutive ofM&GandasExecutiveDirectorofthe Companywitheffectfrom10August2018. MrStowesteppeddownasChairmanand ChiefExecutiveOfficerofPrudential’s NorthAmericanBusinessUnitandasan ExecutiveDirectoroftheCompanywith effectfrom31December2018.Hewas succeededbyMichaelFalconwhojoined theBoardfrom7January2019andholds thetitleofChiefExecutiveOfficer ofJacksonHoldingsLLC. MrFalconwillstepdownasanExecutive DirectoroftheBoardattheconclusionof the2019AnnualGeneralMeeting,aswill MrFoleyandMrNicandrou.Thesechanges arebeingmadeaspartofourprogress towardsdemergerandaremorefully describedonpage88.EachofMrFalcon, MrFoleyandMrNicandrouwillmaintaintheir rolesaschiefexecutivesoftheirrespective businessunitsandmembersoftheGroup ExecutiveCommittee. Paul Manduca Chairman Appointment:October2010 Age:67 N&G Chief Executive Michael Wells Group Chief Executive Appointment:January2011 Age:58 Board changes Non-executive Directors MrsWicker-Miurinwasappointedasa Non-executiveDirectorandamemberofthe RemunerationCommitteewitheffectfrom 3September2018. MsSchroederjoinedtheRiskCommittee witheffectfrom1March2018. MrWatjenjoinedtheRiskCommitteewith effectfrom1November2018. Asannouncedon28February,LordTurner willstepdownfromtheBoardwitheffect fromtheconclusionofthe2019Annual GeneralMeeting. www.prudential.co.uk AnnualReport2018 Prudential plc 89 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationBoard of Directors continued Executive Directors Mark FitzPatrick CA Chief Financial Officer Appointment:July2017 Age: 50 James Turner FCA Group Chief Risk Officer Appointment:March2018 Age: 49 Relevant skills and experience Markhasastrongbackgroundacrossfinancial services,insuranceandinvestmentmanagement, encompassingwidegeographicalexperience relevanttotheGroup’skeymarkets. MarkpreviouslyworkedatDeloittefor26years, buildinghisindustryfocusoninsuranceand investmentmanagementglobally.Duringthis time,MarkwasmanagingpartnerforClients andMarkets,amemberoftheexecutive committeeandamemberoftheboardof DeloitteUK.HewasavicechairmanofDeloitte forfouryears,leadingtheCFOProgrammeand developingtheCFOTransitionlabs.Mark previouslyledtheInsurance&Investment Managementauditpracticeandtheinsurance industrypractice. MarkjoinedtheBoardasanExecutiveDirector andChiefFinancialOfficerinJuly2017. Relevant skills and experience HavingheldseniorpositionsatPrudentialfor anumberofyears,Jameshasawide-ranging understandingofthebusinessanddrawson previousexperienceacrossinternalaudit, financeandcomplianceaswellastechnical knowledge. JameshasledinternalauditteamsinUBSin boththeUKandSwitzerland.Priortojoining Prudential,Jameswasthedeputyheadof complianceforBarclaysplc.Healsohelda numberofseniorinternalauditrolesacrossthe Barclaysgroup,leadingteamsthatcoveredthe UK,theUS,WesternEurope,AfricaandAsia retailandcommercialbankingactivities. JamesjoinedPrudentialinNovember2010as theDirectorofGroup-wideInternalAuditand wasappointedDirectorofGroupFinancein September2015,withresponsibilityfordelivery oftheGroup’sinternalandexternalfinancial reporting,businessplanning,performance monitoringandcapitalandliquidityplanning. HealsoledthedevelopmentoftheGroup’s SolvencyIIinternalmodel. JamesjoinedtheBoardasanExecutiveDirector andGroupChiefRiskOfficerinMarch2018. Other appointments — WestBromwichBuildingSociety (non-executivedirector) Michael Falcon Chief Executive Officer of Jackson Holdings LLC Appointment:January2019 Age: 56 Relevant skills and experience Michaelhasextensiveexperienceinsenior positionsacrossarangeoffinancialservices institutionsintheUSandAsia. MichaelholdsadegreeinFinancefromIndiana Universityandbeganhiscareerincommercial andinvestmentbankingatChaseManhattan Bankin1985.Between1989and2000, MichaelworkedatSaraLeeCorporation (nowHanesbrands,Inc)inavarietyofsenior financial,strategicandgeneralmanagement roles,basedinChicago,ParisandWinston- Salem,NorthCarolina. Between2000and2008Michaelworkedat MerrillLynch,servingasheadoftheretirement groupandotherroles,includingheadofstrategy andfinancefortheUSPrivateClientbusiness. Michaellaterservedasaconsultantand strategicadvisertocompaniesintheretirement, equityawards,wealthmanagementandasset managementindustriesuntiljoiningJ.P.Morgan AssetManagementin2010.Michaelhasserved asatrusteeandexecutivecommitteememberof EBRI(theEmployeeBenefitResearchInstitute) andwasfoundingchairmanoftheAdvisory BoardofEBRI’sCenterforRetirementIncome Researchbetween2011and2014. BeforejoiningPrudential,Michaelwasbased inHongKongaschiefexecutiveofficerofAsia PacificforJ.P.MorganAssetManagement, aroleheheldsince2015,andwasheadofAsia Pacificfundsfrom2014.HejoinedJ.P.Morgan AssetManagementinNewYorkasheadof retirementin2010,responsibleforinvestment managementandplanservicebusinessesinthe definedcontribution,individualretirementand taxablesavingsmarket. MichaeljoinedtheBoardinJanuary2019as anExecutiveDirector,succeedingBarryStowe, andholdsthetitleofChiefExecutiveOfficerof JacksonHoldingsLLC(Jackson),whichincludes Jackson’sUSsubsidiariesandaffiliates(formerly theNorthAmericanBusinessUnit). 90 Prudential plc AnnualReport2018 www.prudential.co.uk John Foley Chief Executive of M&GPrudential Appointment:January2016 Age: 62 Nicolaos Nicandrou ACA Chief Executive of Prudential Corporation Asia Appointment:October2009 Age: 53 Relevant skills and experience Nichasafinancebackgroundandhavingbuilt updeepknowledgeoftheGroup,movedto thepositionofChiefExecutiveofPrudential CorporationAsiainJuly2017.Nicisresponsible forPrudentialCorporationAsia’slifeinsurance andassetmanagementbusinessacross 14marketsintheregion. NicstartedhiscareeratPricewaterhouseCoopers (PwC).BeforejoiningPrudential,heworkedat Aviva,whereheheldanumberofseniorfinance roles,includingNorwichUnionLifefinance directorandboardmember,Avivagroup financialcontroldirector,Avivagroupfinancial managementandreportingdirectorand CGNUgroupfinancialreportingdirector. NicjoinedtheBoardinOctober2009asan ExecutiveDirectorandChiefFinancialOfficer. Other appointments — CITIC-PrudentialLifeInsuranceCompany Limited(chairman)(aPrudentialplcjoint venture) Relevant skills and experience Johnhaswide-rangingexperienceofdifferent seniorrolesinfinancialservices,bothat Prudentialandinhisearliercareer,makinghim wellplacedtoleadM&GPrudentialanddeliver onitslong-termstrategicaims. Johnspentover20yearsatHillSamuel&Co, whereheworkedineverydivisionofthebank, culminatinginseniorrolesinrisk,capitalmarkets andtreasuryofthecombinedTSBandHill SamuelBank.BeforejoiningPrudential,John spentthreeyearsasgeneralmanager,global capitalmarketsatNationalAustraliaBank. JohnjoinedPrudentialasDeputyGroup Treasurerin2000andbecameManaging DirectorofPrudentialCapitalandGroup Treasurerin2001.Duringhiscareerat Prudential,JohnhasheldtheofficesofChief ExecutiveofPrudentialCapital,GroupChief RiskOfficer,GroupInvestmentDirectorand ChiefExecutiveofPrudentialUK&Europe. JohnfirstjoinedtheBoardin2011asGroup ChiefRiskOfficerandwasreappointedin January2016,havingsteppeddownduringhis timeasGroupInvestmentDirector. In2017,John’srolewasexpandedfromChief ExecutiveofPrudentialUK&EuropetoChief ExecutiveofM&GPrudential,theGroup’s combinedUKassetmanagementandsavings andretirementsolutionsbusiness.In2018he tookontheadditionalresponsibilityofactingas ChiefExecutiveofthekeyregulatedentitiesof M&GandPrudentialUK. www.prudential.co.uk AnnualReport2018 Prudential plc 91 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNon-executive Directors The Hon. Philip Remnant CBE FCA Senior Independent Director Appointment:January2013 Age:64 Sir Howard Davies Appointment:October2010 Age: 68 David Law ACA Appointment:September2015 Age: 58 Audit N&G Rem Audit N&G Risk Audit N&G Risk Relevant skills and experience Philipcontributesexperienceacrossanumber ofsectorsandinparticularlistedcompany experienceandthefinancialservicesindustry, includingassetmanagement,intheUK andEurope. PhilipwasasenioradvisoratCreditSuisseand avicechairmanofCreditSuisseFirstBoston (CSFB)EuropeandheadoftheUKInvestment BankingDepartment.Hewastwiceseconded totheroleofdirectorgeneraloftheTakeover Panel.Philipalsoservedontheboardof NorthernRockplcandaschairmanofthe ShareholderExecutive.UntilJuly2018,he alsoservedontheboardofUKFinancial InvestmentsLimited. PhilipjoinedtheBoardinJanuary2013as aNon-executiveDirector,asSeniorIndependent DirectorandasamemberofeachoftheAudit Committee,theRemunerationCommitteeand theNomination&GovernanceCommittee. HealsochairedtheM&GGroupLimitedboard fromApril2016untilOctober2018. Other appointments — SevernTrentplc — CityofLondonInvestmentTrust(chairman) — TakeoverPanel(deputychairman) Relevant skills and experience SirHowardhasawealthofexperienceinthe financialservicesindustry,acrosstheCivil Service,consultancy,assetmanagement, regulatoryandacademia.Healsocontributes hisdetailedknowledgeoftheGroup’skey internationalmarketsincludingtheUK,Europe, NorthAmericaandAsiaaswellasinternational regulatoryexperience. SirHowardwaspreviouslychairmanofthe PhoenixGroupandanindependentdirector ofMorganStanleyInc. SirHowardjoinedtheBoardinOctober2010 asaNon-executiveDirectorandChairofthe RiskCommittee.HejoinedtheAuditCommittee inNovember2010andtheNomination& GovernanceCommitteeinJuly2012. Other appointments — RoyalBankofScotland(chairman) — ChinaBankingRegulatoryCommission internationaladvisoryboard — ChinaSecuritiesRegulatoryCommission internationaladvisoryboard(chairman) — Institutd’ÉtudesPolitiques(SciencesPo) — MillenniumLLCregulatoryadvisoryboard Relevant skills and experience DavidhasexperienceacrosstheGroup’skey internationalmarketsincludingtheUK,Europe, NorthAmericaandAsia,andacrossanumber ofindustrysectors.Hecontributesextensive technicalknowledgeofaudit,accountingand financialreportingessentialtohisroleas ChairoftheAuditCommittee. Davidwasthegloballeaderof PricewaterhouseCoopers(PwC)insurance practice,apartnerinPwC’sUKfirm,and workedastheleadauditpartnerformulti- nationalinsurancecompaniesuntilhis retirementin2015.Davidhasalsobeen responsibleforPwC’sinsuranceandinvestment managementassurancepracticeinLondonand thefirm’sScottishassurancedivision. DavidjoinedtheBoardinSeptember2015as aNon-executiveDirectorandmemberofthe AuditCommittee.DavidwasappointedChair oftheAuditCommitteeandamemberofthe RiskCommitteeandoftheNomination& GovernanceCommitteeinMay2017. Other appointments (until July 2019) — L&FHoldingsLimited(CEO)andits subsidiaries(theprofessionalindemnity captiveinsurancegroupthatservesthe PwCnetworkanditsmemberfirms) 92 Prudential plc AnnualReport2018 www.prudential.co.uk Board of Directors continuedKey to Committee membership  Chair  Audit Chair Audit N&G  Nomination&Governance Rem  Remuneration Risk  Risk Kaikhushru Nargolwala FCA Anthony Nightingale CMG SBS JP Alice Schroeder Appointment:January2012 Age: 68 Appointment:June2013 Age: 71 Appointment:June2013 Age: 62 Rem Risk N&G Rem Audit Risk Relevant skills and experience KaihasexperienceacrosssomeoftheGroup’s keyinternationalmarkets,particularlyHong KongandthewiderAsianmarket.Inadditionto hisexperiencewithlistedgroups,hecontributes knowledgeofthefinancialservicessector. Kaispent19yearsatBankofAmericaandwas basedinHongKonginrolesasgroupexecutive vicepresidentandheadoftheAsiaWholesale BankingGroupduring1990to1995.Hespent 10yearsworkingforStandardCharteredPLC inSingaporeasgroupexecutivedirector responsibleforAsiaGovernanceandRisk during1998to2007.Kaiwaschiefexecutive officeroftheAsiaPacificRegionofCreditSuisse AGduring2008to2010andnowservesas directorandchairmanoftheirremuneration committee. Kaihasservedonanumberofotherboards, includingSingaporeTelecommunicationsand TateandLyleplc. KaijoinedtheBoardinJanuary2012asa Non-executiveDirectorandmemberofthe RemunerationandRiskCommittees. Other appointments — PrudentialCorporationAsiaLimited (Prudentialplcsubsidiary)(chairman) — CliffordCapitalPte.Ltd(chair) — CreditSuisseGroupAG — Duke-NUSMedicalSchool(chairman) — PSAInternationalPteLtd Relevant skills and experience Anthonyhaslongexecutiveexperienceof listedcompaniesand,inparticular,extensive knowledgeofAsianmarkets. Relevant skills and experience Alicehasexperienceacrosstheinsurance,asset management,technologyandfinancialservices industriesintheUS. AnthonyspenthiscareerinAsia,wherehe joinedtheJardineMathesonGroupin1969, holdinganumberofseniorpositionsbefore joiningtheboardofJardineMathesonHoldings in1994.Hewasmanagingdirectorofthe JardineMathesonGroupfrom2006to2012. HispositionontheHongKong-APECtrade policystudygroupendedin2018andhe resignedasamemberoftheUK-ASEAN BusinessCouncilin2019. AnthonyjoinedtheBoardinJune2013asa Non-executiveDirectorandmemberofthe RemunerationCommittee.HebecameChairof theRemunerationCommitteeandamemberof theNomination&GovernanceCommitteein May2015. Other appointments — JardineMathesonHoldings(andother JardineMathesongroupcompanies) — SchindlerHoldingLimited — ShuiOnLandLimited — VitasoyInternationalHoldingsLimited — TheInnovationandStrategicDevelopment CouncilinHongKong — TheAPECVisionGroup Alicebeganhercareerasaqualifiedaccountant atErnst&Young.ShejoinedtheFinancial AccountingStandardsBoardasamanagerin 1991,overseeingtheissuanceofseveral significantinsuranceaccountingstandards. From1993,sheledteamsofanalystsspecialising inproperty-casualtyinsuranceasamanaging directoratCIBSOppenheimer,PaineWebber (nowUBS)andMorganStanley.Alicewasalso anindependentboardmemberoftheCetera FinancialGroupandheldtheofficeofCEO andchairofShowferMediaLLC(formerly WebTuner).ShewasalsoadirectorofBank ofAmericaMerrillLynchInternationaluntil December2018. AlicejoinedtheBoardinJune2013asa Non-executiveDirectorandmemberofthe AuditCommittee.Shebecameamember oftheRiskCommitteeinMarch2018. Other appointments — QuorumHealthCorporation — NatusMedicalIncorporated www.prudential.co.uk AnnualReport2018 Prudential plc 93 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationKey to Committee membership  Chair  Audit Chair Audit N&G  Nomination&Governance Rem  Remuneration Risk  Risk Non-executive Directors continued Lord Turner FRS Appointment:September2015 Age: 63 Thomas Watjen Appointment:July2017 Age: 64 Fields Wicker-Miurin OBE Appointment:September2018 Age: 60 Audit Risk Rem Risk Rem Relevant skills and experience LordTurnerhasextensiveknowledgeand experienceoftheUKregulatoryregime. LordTurnerbeganhiscareerwithMcKinsey&Co, advisingcompaniesacrossarangeofindustries. Heservedasdirector-generalofthe ConfederationofBritishIndustry,vice-chairman ofMerrillLynchEurope,chairmanofthe PensionsCommissionandasanon-executive directorofStandardCharteredBank. LordTurnerwaschairmanoftheUK’sFinancial ServicesAuthority,amemberofthe internationalFinancialStabilityBoardanda non-executivedirectoroftheBankofEngland. LordTurnerjoinedtheBoardinSeptember2015 asaNon-executiveDirectorandmemberofthe RiskCommittee.Hebecameamemberofthe AuditCommitteeinMay2017. Other appointments — ChubbEurope(chairman) — EnergyTransitionCommission(chairman) — EnvisionLimited(advisoryboard) — HouseofLordscrossbenchmember (from2005) — SeniorFellowoftheInstituteforNew EconomicThinking — LondonSchoolofEconomicsand CassBusinessSchool(visitingprofessor) — OakNorthBank(advisor) Relevant skills and experience Tomhasexperienceacrosstheinsurance,asset managementandfinancialservicesindustriesas wellasexperiencewithlistedcompaniesinthe UKandtheUS. TomstartedhiscareeratAetnaLifeand CasualtybeforejoiningConning&Company, aninvestmentandassetmanagementprovider, wherehebecameapartnerintheconsulting andprivatecapitalareas.HejoinedMorgan Stanleyin1987,andbecameamanaging directorinitsinsurancepractice. In1994hewasappointedexecutivevice presidentandchieffinancialofficerofProvident CompaniesInc. Hewasakeymemberoftheteamassociated withProvident’smergerwithUnumin1999and wasappointedpresidentandchiefexecutive officeroftherenamedUnumGroupin2003, arolehehelduntilMay2017. TomjoinedtheBoardinJuly2017asa Non-executiveDirectorandmemberofthe RemunerationCommittee.Hebecame amemberoftheRiskCommitteein November2018. Other appointments — SunTrustBanks,Inc Relevant skills and experience Fieldshasextensiveinternationalboardroom experience,combiningknowledgeofthe Group’skeygeographicmarketswith experienceacrosstheglobalfinancialservices industry. FieldsstartedhercareeratPhiladelphiaNational Bankin1982beforejoiningStrategicPlanning Associates(nowOliverWyman)asasenior partnerin1989.Shebecamechieffinancial officeranddirectorofstrategyattheLondon StockExchangein1994,leaderoftheglobal marketspracticeofATKearneyin1998and managingdirectorofVestaCapitalAdvisors in2000.ShewasappointedtoNasdaq’s TechnologyAdvisoryCouncilin2000andwas amemberofthepanelofexpertsadvisingthe EuropeanParliamentonfinancialmarkets harmonisationforfouryearsfrom2002.She becameanon-executivedirectorandchair oftheauditcommitteeofSavillsplcin2002 andanon-executivedirectorandchairofthe investmentcommitteeoftheRoyalLondon Groupin2003. FieldsjoinedtheBoardinSeptember2018as aNon-executiveDirectorandmemberofthe RemunerationCommittee. Other appointments — BNPParibas — SCORSE — DepartmentforDigital,Culture, Media&Sport — Leaders’Quest(Partner) 94 Prudential plc AnnualReport2018 www.prudential.co.uk Board of Directors continuedHow we operate This section tells you more about the Group’s governance, operation of the Board and Board roles. Group governance Corporate governance codes – statement of compliance TheCompanyhasdualprimarylistingsin London(premiumlisting)andHongKong andhasthereforeadoptedagovernance structurebasedontheUKandHongKong CorporateGovernanceCodes(theUKand HKCodes). TheBoardconfirmsthat,fortheyearunder review,theCompanyhascompliedwithall theprinciplesandprovisionsofthe2016 UKCode,whichwasapplicableforthe reportingperiod.TheCompanyhas beenapplyingthe2018UKCodefrom 1January2019. TheCompanyhasalsocompliedwiththe provisionoftheHKCodeotherthanas follows:ProvisionB.1.2(d)oftheHKCode requirescompanies,onacomplyorexplain basis,tohavearemunerationcommittee whichmakesrecommendationstoamain boardontheremunerationofnon- executivedirectors.Thisprovisionisnot compatiblewithsupportingprovisionD.2.3 oftheUKCodewhichrecommendsthat theboarddeterminestheremunerationof non-executivedirectors.Prudentialhas chosentoadoptapracticeinlinewiththe recommendationsoftheUKCode. TheUKCodeisavailablefrom: www.frc.org.uk TheHKCodeisavailablefrom: www.hkex.com.hk Our governance framework TheGrouphasestablishedagovernance frameworkforthebusinesswhichis designedtopromoteappropriate behavioursacrosstheGroup. Thegovernanceframeworkincludesthe keymechanismsthroughwhichtheGroup setsstrategy,plansitsobjectives,monitors performance,considersriskmanagement, holdsbusinessunitstoaccountfor deliveringonbusinessplansandarranges governance. TheGroupGovernanceManual(the Manual)setsoutthepoliciesand proceduresunderwhichtheGroup operates,takingintoaccountstatutory, regulatoryandotherrelevantmatters. Businessunitsmanageandreport compliancewiththeGroup-wide mandatoryrequirementsandstandards setoutintheManualthroughannual attestations.Thisincludescompliancewith ourriskmanagementframework,detailsof whicharesetoutonpages107and108of thisreport. ThecontentoftheManualisreviewed regularly,reflectingthedevelopingnature ofboththeGroupandthemarketsinwhich itoperates,withsignificantchangesonkey policiesreportedtotherelevantBoard Committee. Material Subsidiary governance Prudentialhasappointedindependent non-executivedirectorstotheboardsofits fourMaterialSubsidiaryentitieswithinthe Group:JacksonNationalLifeInsurance Company,M&GGroupLimited,Prudential CorporationAsiaLimitedandThe PrudentialAssuranceCompanyLimited. EachMaterialSubsidiaryhasaboardof directorsledbyanindependentchairand anauditcommitteeandriskcommittee, composedentirelyofindependent non-executives. DialoguebetweentheGroupChair,Group RiskCommitteeChairandGroupAudit CommitteeChairandtheircounterparts intheMaterialSubsidiariesprovidesan effectiveinformationflow.Overthecourse of2018andearly2019,theBoardof M&GPrudentialhasbeendevelopedby itsindependentChairman,MrMikeEvans. MrEvansandtheGroupChairhave maintaineddialoguethroughout. Anevaluationoftheboard,auditandrisk committeesofeachMaterialSubsidiary wascarriedoutinrespectof2018which concludedthateachofthoseboardsand committeesoperatedeffectivelyduring theyear.Anassessmentofwhethereach businessunitauditandriskcommittee hasfulfilledtheirmandatesisconducted annuallyandtheresultsreportedtothe GroupAuditCommitteeandGroupRisk Committee. TheNomination&GovernanceCommittee isresponsibleforoversightofgovernance arrangementsfortheMaterialSubsidiaries. ThisandotheractivitiesoftheNomination &GovernanceCommitteeduring2018are describedonpages109to114. AspartoftheGroup’sfocusoncorporate responsibility,theboardsofeachofour MaterialSubsidiariesconsidersupdates oncorporateresponsibilityactivitiesand spendintheircommunitiesonanannual basis.Thishascreatedalayerof independentscrutinytohelpensurethose boardsareclosetothecommunityand charitableactivitiesoftheirbusinesses. Regulatory environment Untilthedemergeriscompleted,the PrudentialRegulationAuthority(PRA)will continuetobetheGroup-widesupervisor ofPrudential.ThePRAwillbetheGroup- widesupervisorofM&GPrudential followingthedemerger.Afterthedemerger, Prudential’sindividualinsuranceandasset managementbusinesseswillcontinuetobe supervisedatalocalentitylevelandlocal statutorycapitalrequirementswillcontinue toapply.TheSupervisoryCollege,madeup oftheauthoritiesoverseeingtheprincipal regulatedactivitiesinjurisdictionswhere thefuturePrudentialGroupwilloperate, hasmadeacollectivedecisionthatHong Kong’sInsuranceAuthority(IA)should becomethenewGroup-widesupervisor forPrudentialplc. Interactionswithourregulatorsshapeour governanceframeworkandtheChairman andGroupChiefExecutiveplayaleading roleinrepresentingtheGrouptoregulators andensuringourdialoguewiththemis constructive. Stakeholder engagement TheBoardhasidentifiedtheGroup’skey stakeholdersasincludingcustomers, investors,employees,regulators,civil society,themediaandsuppliers. Duringtheyear,theBoardconsidered workforceengagementactivitiesinlight oftheprovisionsoftherevisedUKCode publishedinJuly2018.In2019theGroup willbeputtinginplaceprocedurestohelp ensurethatworkforcepracticesand policiesareconsistentwiththeGroup’s valuesandsupportitslong-term sustainablesuccessandthattheworkforce voiceisunderstoodatBoardlevel. Asamajorinstitutionalinvestor,theBoard recognisestheimportanceofmaintaining anappropriateleveloftwo-way communicationwithshareholders. www.prudential.co.uk AnnualReport2018 Prudential plc 95 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationTheAnnualGeneralMeetingisan opportunityforfurthershareholder engagement,fortheChairmanto explaintheCompany’sprogressand, alongwithothermembersoftheBoard, toansweranyquestions.AllDirectors theninofficeattendedthe2018Annual GeneralMeeting. Detailsofthe2019Annual GeneralMeetingareavailableat www.prudential.co.uk/investors Afullprogrammeofengagementwith shareholders,potentialinvestorsand analysts,intheUKandoverseas,is conductedeachyearbytheGroupChief ExecutiveandtheChiefFinancialOfficer, ledbytheInvestorRelationsteam.A conferenceforinvestorsandanalystsis heldonaregularbasis,includingin-depth businesspresentationsandopportunities forattendeestomeetwithmembersof theBoardandseniorexecutivesandan opportunityfortheexecutiveteamto communicateprogressandstrategy outsideofthefinancialreportingcycle.The mostrecenteventwasheldinNovember 2018andfeedbackwasprovidedtothe BoardinNovemberandDecember2018. TheGroupChiefExecutive,ChiefFinancial OfficerandInvestorRelationsteamalso attendmajorfinancialservicesconferences topresentto,andmeetwith,the Company’sshareholders. In2018,aspartoftheinvestorrelations programme,over370meetingswereheld withmorethan300individualinstitutional investorsinLondon,continentalEurope, theUSAandAsia. TheCompanyholdsanongoing programmeofregularcontactwithmajor shareholders,conductedbytheChairman, todiscusstheirviewsontheCompany’s governance.TheSeniorIndependent Directoroffersmeetingstomajor shareholdersasneededandthisyear carriedoutaconsultationspecificallyon theChairman’stenure.Engagementwith institutionalinvestorsontheDirectors’ RemunerationPolicyandimplementation isledbytheRemunerationCommittee Chaironanannualbasis.OtherNon- executiveDirectorsareavailabletomeet withmajorshareholdersonrequest. Shareholderfeedbackandkeyissuesfrom thesemeetingsiscommunicatedtothe Board.Detailsofwhenfeedbackwas discussedbytheBoardin2018canbe foundinthetableonpage97. TheAnnualGeneralMeetingisan opportunityforfurthershareholder engagement,fortheChairmantoexplain theCompany’sprogressand,alongwith othermembersoftheBoard,toanswer anyquestions.AllDirectorstheninoffice attendedthe2018AnnualGeneral Meeting. Detailsofthe2019AnnualGeneral Meetingareavailableat www.prudential.co.uk/investors Moredetailsofstakeholderengagement withourcommunitiesandsocietiescan befoundinourCorporateresponsibility reviewonpages70to86andonour websiteatwww.prudential.co.uk/ responsibility/approach. Operation of the Board How the Board leads the Group TheGroupisheadedbyaBoardledby theChairman. TheBoardiscurrentlymadeupof16 Directors,ofwhichamajority,excluding theChairman,areindependentNon- executiveDirectors.Biographicaldetails ofeachoftheDirectorscanbefound onpages89to94andfurtherdetailsof therolesoftheChairman,GroupChief Executive,SeniorIndependentDirector, CommitteeChairsandtheNon-executive Directorscanbefoundonpages101 and102. TheBoardiscollectivelyresponsibleto shareholdersforthelong-termsustainable successofthebusinessthrough: — ApprovingtheGroup’slong-term strategicobjectives,annualbudgets andbusinessplans,asrecommended bytheGroupChiefExecutiveandany materialchangestothem; — Monitoringtheimplementationof strategicobjectives,annualbudgets andbusinessplans; — EstablishingtheCompany’spurpose, valuesandstrategyandsatisfyingitself thatthesearealignedwiththeGroup’s culture;and — Assessingandmonitoringculture, includingalignmentwithpolicy, practices,behavioursandriskappetite. Specificmattersarereservedfordecision bytheBoard,including: — Approvingdividendpolicyand determinationofdividends; — Approvalofstrategicprojects; — Approvalofthethree-yearbusiness andfinancialplan; — ApprovaloftheGroup’sfulland half-yearlyresultsannouncementsand anyotherperiodicfinancialreporting; — Responsibilityforaneffectivesystemof internalcontrolandriskmanagement; — OverseeingtheGroup’scorporate socialresponsibilityprogrammes;and — Ensuringeffectiveengagementwith, andencouragingparticipationfrom, keystakeholdergroups. 96 Prudential plc AnnualReport2018 www.prudential.co.uk How we operate continuedKey areas of focus – how the Board spent its time TheBoardheld10meetingsduring2018.Inadditiontothosemeetingssetoutinthetablebelow,theBoardheldaseparatetwo-day strategyeventinJuneandtwoBoardworkshopsfocusedonthedemerger. Inadditiontomeetings,theBoardreceivesamonthlyupdatereportfrommanagement. Mar1 Apr May Jun Jul Aug Sep Oct Dec Strategy and implementation Approvalandreviewofstrategicpriorities Strategicprioritiesmonitoring Approvalofthree-yearoperatingplan Strategicprojects2 GroupChiefExecutive’sreport Report from Committee Chairs Audit Nomination&Governance Remuneration Risk Financial reporting and dividends ChiefFinancialOfficer’sperformancereport Fullyear Halfyear GroupSolvencyIIreporting Business unit Chief Executive updates PrudentialCorporationAsia Jackson M&GPrudential Risk, regulatory and compliance Regulatoryandcomplianceupdates ChiefRiskOfficer’sreport Governmentrelations Relationswithregulators Governance and stakeholders Governanceupdates Boardevaluationandactionstracking Successionplanning CorporateresponsibilityreportingandESG Diversityandinclusion Talentreview Non-executiveDirectors’fees Investorupdatesincludingfeedbackoninvestormeetings l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l Notes 1 TheBoardheldtwomeetingsinMarch2018. 2 StrategicprojectsconsideredduringtheyearincludedthedemergerofM&GPrudential,announcedinMarch,theacquisitionofTMBAssetManagementCo.,Ltd.inThailand,announcedinJuly, andtherenewalofthebancassurancealliancewithUnitedOverseasBankLimited,announcedinJanuary2019,aswellasotherconfidentialmatters. www.prudential.co.uk AnnualReport2018 Prudential plc 97 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Board and Committee meeting attendance throughout 2018 IndividualDirectors’attendanceatmeetingsthroughouttheyearissetoutinthetablebelow. Chairman PaulManduca Executive Directors Nomination & Governance Committee 3meetings llll Audit Committee 9meetings Board 10meetings llllllllll llllllllll MikeWells llllllllll MarkFitzPatrick llllllllll JamesTurner llllllllll JohnFoley llllllllll NicNicandrou llllllllll AnneRichards1 llllllllll BarryStowe2 llllllllll lllllllll llll PhilipRemnant lll llllllllll lllllllll HowardDavies llllllllll lllllllll lll DavidLaw llllllllll KaiNargolwala AnthonyNightingale llllllllll AliceSchroeder3 LordTurner TomWatjen4 FieldsWicker-Miurin5 llllllllll lllllllll llllllllll lllllllll llllllllll lllll lll Remuneration Committee 5meetings Risk Committee 5meetings Joint Audit and Risk Committee 1meeting lllll lllll lllll lllll ll lllll lllll lllll llll lllll l l l l l l l General Meeting 1meeting l l l l l l l l l l l l l l l l Non- executive Directors Notes 1 MsRichardssteppeddownfromtheBoardwitheffectfrom10August2018. 2 MrStowesteppeddownfromtheBoardwitheffectfrom31December2018. 3 MsSchroederwasappointedamemberoftheRiskCommitteewitheffectfrom1March2018. 4 MrWatjenwasappointedamemberoftheRiskCommitteewitheffectfrom1November2018. 5 MrsWicker-MiurinwasappointedamemberoftheBoardwitheffectfrom3September2018. BoardandCommitteepapersareusuallyprovidedoneweekinadvanceofameeting.WhereaDirectorisunabletoattendameeting, hisorherviewsarecanvassedinadvancebytheChairmanofthatmeetingwherepossible. 98 Prudential plc AnnualReport2018 www.prudential.co.uk How we operate continuedBoard effectiveness Actions during 2018 arising from the 2017 review Attheendof2017,anexternallyfacilitatedreviewoftheBoard’seffectivenesswascarriedoutbyBoardroomReviewLimited.During 2018,theactionpointsthathadbeenidentifiedinthatreviewwereaddressedandtheBoardreceivedanupdateonprogressagainst thoseactionsinSeptember2018andFebruary2019. Setoutbelowarethethemes,summaryofactionsandprogressupdates: Theme Summary of actions Progress Creating the right environment for critical decision- making Spendadditionaltimeonsitevisits ContinuetoholdNon-executiveDirector onlysessionsonanasrequiredbasis — TheagendaoftheApril2018BoardmeetingheldinSingapore wasextendedtoensurethatarangeofinternalandexternal stakeholderviewsontheGroup’sAsiabusinesswasgiven. — DuringtheBoardvisittoWashington,DCinSeptember2018, theJacksonHoldingsteamprovidedtheBoardwithupdates ontheUSbusinessandwithaspecificperspectiveontheUS government,itsregulatoryregimeandimpactontheJackson Holdingsbusinesses. — TheChairman’scurrentpracticeofholdingregularprivate Non-executiveDirectormeetingshascontinuedandNon- executiveDirectorsmayrequestadditionalmeetingsifneeded. — Thepracticeofprivate,members-onlymeetingsisalso establishedseparatelyfortheRiskandAuditCommitteesand hascontinuedin2018,withadhocprivatemeetingsbeingheld asrequired. Highlighting culture on the agenda ProvidefurtherreportstotheBoardon culturein2018andmaturetheGroup’s strategicobjectivetodevelopaframework forameasurable,definableculture — AreportonculturewaspresentedtotheBoardinOctober 2018detailingactionstakenandproposedactionsupto demergerandbeyond. — TheRiskCommitteecontinuestomonitorriskcultureacross Increasing the Board’s resilience Continuetofocusongenderandother diversityinallnewBoardappointments Introduceaskillsmaptomonitorexperience andexpertisemoreformally theorganisation. — TheBoardhasapprovedamendmentstoitstermsofreference whichformalisetheBoard’sroleinestablishingtheGroup’s purpose,valuesandstrategyandensuringthealignment ofthesewithGroupculture. — TheappointmentofMrsWicker-MiurinasaNon-executive DirectorandmemberoftheRemunerationCommitteewith effectfrom3September2018,helpedtostrengthenthe Board’srangeofskills,technicalexpertiseandknowledge. — ThesearchforadditionalNon-executiveDirectorsisongoing giventheBoard’sdesiretocontinueenhancingitsdiversity, includinggenderandgeography. — TheNomination&GovernanceCommitteecontinuestoutilise askillsmapforNon-executiveDirectorsuccessionplanning toensurethatgapsinBoardexperienceorknowledgeare identifiedandaddressed. www.prudential.co.uk AnnualReport2018 Prudential plc 99 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationBoard site visits Singapore InSingapore,theBoardreceiveddeep divepresentationson: — EastspringInvestments, PrudentialCorporationAsia’s assetmanagementbusiness; — Thehealthecosystemand partnershipsthatPrudential CorporationAsiaisdeveloping, includingwithhealthcare technologyandservicescompany, BabylonHealth; — Digitisationandcustomeracquisition; — ExpandingtheGroup’spresence inChina;and — Financialandperformanceupdates ontheSingaporebusinessand Asiamorewidely. Washington, DC, USA InWashington,theBoardfocusedon Jackson’sinitiativesaround: — Customerunderstandingofvariable annuityproducts; — Distribution; — Regulatorymodernisationand governmentinteractions;and — Technologyandpeople. 2018 review and actions for 2019 TheperformanceevaluationoftheBoardanditsprincipalCommitteesfor2018was conductedinternallyattheendof2018throughaquestionnaire.Thefindingswere presentedtotheBoardinFebruary2019andanactionplanagreedtoaddressareas offocusidentifiedbytheevaluation. ThereviewconfirmedthattheBoardcontinuedtooperateeffectivelyduringtheyear andnomajorareasrequiringimprovementwerehighlighted. Theme Summarised actions Board composition and process Risk, capital and audit ContinuingworkonBoardsuccessionwithafocusongenderand geographicdiversity. ReductioninBoardandCommitteepapervolume. CyberriskfocusforBoardagendafor2019. BoardtrainingontheHKInsuranceAuthorityregulatoryregime. Stakeholders Reviewofstakeholdergroups. ReviewofworkforcevoiceanditsrepresentationatBoardlevel. People DevelopdiversityandinclusionreportingtotheBoard. Ensureoverseasand‘home’BoardsgivescopeforNon-executives tomeetcolleaguesbelowGroupExecutiveCommitteelevel. Director evaluation TheperformanceoftheNon-executive DirectorsandtheGroupChiefExecutive during2018wasevaluatedbythe Chairmaninindividualmeetings. PhilipRemnant,theSeniorIndependent Director,ledtheNon-executiveDirectors inaperformanceevaluationofthe Chairman. ExecutiveDirectorsaresubjecttoregular reviewandtheGroupChiefExecutive individuallyappraisedtheperformance ofeachoftheExecutiveDirectorsaspart oftheannualGroup-wideperformance evaluationofallemployees. Theoutcomeofeachoftheseevaluation processesisreportedtotheNomination &GovernanceCommitteeinFebruaryeach yearinordertoinformtheCommittee’s recommendationforBoardmemberstobe putforwardforre-electionbyshareholders. ExecutiveDirectorperformanceisalso reviewedbytheRemunerationCommittee aspartofitsdeliberationsonbonus payments. 100 Prudential plc AnnualReport2018 www.prudential.co.uk How we operate continuedDirectors Board roles and governance ThetermsofreferenceoftheChairman,GroupChiefExecutiveandSeniorIndependentDirectorwereupdatedinDecember2018to reflectthe2018UKCodeandtheBoardalsoconsideredtheBoardEffectivenessGuidanceissuedbytheFinancialReportingCouncil (FRC)astohowtheserolesoughttobeimplemented. Chairman – Paul Manduca The Chairman is responsible for the leadership and governance of the Board, ensuring its smooth and effective running in discharging its responsibilities to the Group’s stakeholders and managing Board business. Managing Board business — ResponsibleforsettingtheBoardagenda,ensuringtheright issuesarebroughttotheBoard’sattentionthrough collaborationwiththeGroupChiefExecutiveandtheGroup GeneralCounselandCompanySecretary — Facilitatingopen,honestandconstructivedebateamong Directors.Whenchairingmeetings,ensuringthereis sufficienttimetoconsideralltopics,allviewsareheardandall Boardmembers,andinparticularNon-executiveDirectors, haveanopportunitytoconstructivelychallengemanagement — MeetingwithNon-executiveDirectorsthroughouttheyear. In2018,theChairmanmetwithNon-executiveDirectors withoutExecutiveDirectorsbeingpresentonfouroccasions — EnsuringinformationbroughttotheBoardisaccurate,clear, timelyandcontainssufficientanalysisappropriatetothescale andnatureofthedecisionstobemade — PromotingeffectivereportingofBoardCommitteebusiness atBoardmeetingsthroughregularCommitteeChairupdates Governance — LeadingtheBoard’sdeterminationofappropriatecorporate governanceandbusinessvalues,includingethos,valuesand cultureatBoardlevelandthroughouttheGroup — WorkingwiththeGroupGeneralCounselandCompany Secretarytoensurecontinuedgoodgovernance — ActingaskeycontactforindependentchairsofMaterial Subsidiaries — MeetingwiththeindependentchairsoftheGroup’sMaterial SubsidiariesonaregularbasisandreportingtotheBoardon theoutcomeofthosemeetings Relationship with the Group Chief Executive — DiscussingbroadstrategicplanswiththeGroupChief ExecutivepriortosubmissiontotheBoard — EnsuringtheBoardisawareofthenecessaryresourcesto achievethestrategicplan — ProvidingsupportandadvicetotheGroupChiefExecutive Membership and composition of the Board — LeadingtheNomination&GovernanceCommitteein successionplanningandtheidentificationofpotential candidates,havingregardtotheskillsandexperiencethe Boardneedstofulfilitsstrategy,andmaking recommendationstotheBoard — ConsideringthedevelopmentneedsoftheDirectorssothat Directorscontinuallyupdatetheirskillsandknowledge requiredtofulfiltheirduties,includingtheprovisionofa comprehensiveinductionfornewDirectors — MaintaininganeffectivedialoguewiththeNon-executive Directorstoencourageengagementandmaximisetheir contributions Relations with shareholders and other stakeholders — RepresentingtheBoardexternallyatbusiness,politicaland communitylevel.PresentingtheGroup’sviewsandpositions asdeterminedbytheBoard — PlayingamajorroleintheGroup’sengagementwithregulators — Balancingtheinterestsofdifferentcategoriesofstakeholders, preservinganindependentviewandensuringeffective communication — Engaginginaprogrammeofmeetingswithkeyshareholders throughouttheyearandreportingtotheBoardontheissues raisedatthosemeetings External positions — ApprovingDirectors’externalappointmentspriortothem beingaccepted,takingintoaccounttherequiredtime commitmentandescalatingconsiderationofconflicts ofintereststotheNomination&GovernanceCommittee asneeded www.prudential.co.uk AnnualReport2018 Prudential plc 101 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationHow we operate continued Group Chief Executive – Mike Wells Senior Independent Director – Philip Remnant TheGroupChiefExecutiveleadstheExecutiveDirectorsand seniorexecutivesandisresponsiblefortheoperational managementoftheGrouponbehalfoftheBoardona day-to-daybasis: — ResponsiblefortheimplementationofBoarddecisions TheSeniorIndependentDirectoractsasanalternativeconduit totheBoardforshareholderconcernsandleadstheevaluation oftheChairman: — ActsasasoundingboardfortheChairman,providing supportinthedeliveryoftheChairman’sobjectives — Establishesprocessestoensureoperationsarecompliant — LeadstheNon-executiveDirectorsinconductingthe withregulatoryrequirements Chairman’sannualevaluation — Setspolicies,providesday-to-dayleadershipandmakes — HoldsmeetingswithNon-executiveDirectorswithout managementbeingpresent,typicallyatleastonceayear toevaluatetheperformanceoftheChairman — Offersmeetingstomajorshareholderstoprovidethem withanadditionalcommunicationpointonrequestandis generallyavailabletoanyshareholdertoaddressconcerns notresolvedthroughnormalchannels decisionsonmattersaffectingtheoperation,performance andstrategyoftheGroup,seekingBoardapprovalfor mattersreservedtotheBoard — SupportedbytheGroupExecutiveCommitteewhichhe chairsandwhichreceivesreportsonperformanceand implementationofstrategyforeachbusinessunitand discussesmajorprojectsandotheractivitiesrelatedtothe attainmentofstrategy — ChairstheChiefExecutive’sCommitteemeetingswhichare heldweeklytoreviewmattersrequiringapprovalunderthe Group’sframeworkofdelegatedauthorities — KeepsinregularcontactwiththeChairmanandbriefshim onkeyissues — Meetswithkeyregulatorsworldwide — Leadsonday-to-dayeffectivestakeholderengagement Committee Chairs Non-executive Directors EachoftheCommitteeChairsisresponsiblefortheeffective operationoftheirrespectiveCommittees: — Responsiblefortheleadershipandgovernanceoftheir Committee — SetstheagendaforCommitteemeetings — ReportstotheBoardontheactivitiesofeachCommittee meetingandthebusinessconsidered,including,where appropriate,seekingBoardapprovalforactionsin accordancewiththeCommittees’termsofreference — WorkswiththeGroupGeneralCounselandCompany Secretarytoensurethecontinuedgoodgovernanceofeach Committeeduringtheyear InadditiontoCommitteeduties,theChairsoftheAuditandRisk Committeesactaskeycontactpointsfortheindependentchairs oftheauditandriskcommitteesoftheMaterialSubsidiaries AlloftheNon-executiveDirectorsaredeemedtobe independentandtogetherhaveawiderangeofexperience whichcanbeappliedtoattainthestrategicaimsofthe Groupthrough: — Constructiveandeffectivechallenge — Providingstrategicguidanceandofferingspecialistadvice — Scrutinisingandholdingtoaccounttheperformanceof managementinmeetingagreedgoalsandobjectives — ServingonatleastoneoftheBoard’sprincipalCommittees — EngagingwithExecutiveDirectorsandothersenior managementatBoardandCommitteemeetingsaswell asatsitevisits,trainingsessionsandonaninformalbasis — Takingpartinone-to-onemeetingswiththeGroupStrategy teamandparticipationintheannualStrategyAwayDay 102 Prudential plc AnnualReport2018 www.prudential.co.uk TheBoardhasestablishedfourprincipalCommitteeswhosefunctionsaresummarisedbelow. Nomination&Governance Committee Remuneration Committee Audit Committee Risk Committee Chair Paul Manduca — Keepsleadershipneeds underreviewinsupport oftheGroup’sstrategic objectives — Developssuccession planningfortheBoard andseniorexecutives basedonmeritagainst objectivecriteria promotingdiversity inallareas — Overseesdevelopment ofadiversepipelinein successionplanning — MonitorstheGroup’s diversityinitiatives — Recommends appointmentstothe Board,itsprincipal Committeesand appointmentsof non-executivechairs totheboardsofMaterial Subsidiaries — Overseesthegovernance ofMaterialSubsidiaries andtheGroup’soverall governanceframework SeeNomination&Governance Committeereportonpages 109to114 Chair Anthony Nightingale — Ensuresthereisaformal andtransparentprocess forestablishingthe Directors’Remuneration Policy Chair David Law — Responsibleforthe integrityoftheGroup’s financialreporting, includingscrutinising accountingpolicies — Approvesindividual — Monitorsthe effectivenessofinternal controlandrisk managementsystems, includingcompliance arrangements — Monitorsthe effectivenessand objectivityofinternaland externalauditors — Approvestheinternal auditplanand recommendsthe appointmentofthe externalauditor remunerationpackages oftheChairman, ExecutiveDirectors, seniorexecutivesand MaterialSubsidiary non-executivedirectors — Approvestheoverall RemunerationPolicyfor theGroup — Reviewsthedesignand developmentofshare plansandapprovesand assessesperformance targetswhereapplicable andensuresalignment withtheGroup’sculture — Reviewsworkforce remunerationpractices andpolicieswhensetting executiveremuneration Chair Howard Davies — Leadsonandoversees theGroup’soverallrisk appetite,risktolerance andstrategy — ApprovestheGroup’s riskmanagement frameworkandmonitors itseffectiveness — SupportstheBoardand managementin embeddingand maintainingasupportive cultureinrelationtothe managementofrisk — Providesadvicetothe Remuneration Committeeonrisk management considerationstoinform remunerationdecisions SeeRemunerationCommittee reportonpages132to165 SeeAuditCommitteereport onpages115to123 SeeRiskCommitteereport onpages124to127 Termsofreferencefortheprincipal Committeescanbeaccessedat www.prudential.co.uk/investors/ governance-and-policies/board- committees-terms-of-reference TheBoardhasestablishedaStanding Committeewhichcanmeetasrequiredto assistwithanybusinessoftheBoard.Itis typicallyusedforadhocorurgentmatters whichcannotbedelayeduntilthenext scheduledBoardmeeting.AllDirectorsare membersoftheStandingCommitteeand havetherighttoattendallmeetingsand receivepapers. NoticeofaStandingCommitteemeeting issenttoallDirectorsandifanindividual isunabletoattend,he/shecangive commentstotheChairmanorGroup CompanySecretaryaheadofthemeeting forconsiderationbytheStanding Committee.Beforetakingdecisionson anymatter,theStandingCommitteemust firstdeterminethatthebusinessitis consideringisappropriatefora CommitteeoftheBoardanddoesnot properlyneedtobebroughtbeforethe wholeBoard.AllStandingCommittee meetingsarereportedinfulltothenext scheduledBoardmeeting. Over2018,theCompanyheldfive meetingsoftheStandingCommittee. Thisgovernancestructureallowsforfast decision-makingwherenecessary,while ensuringthatthefullBoardhasoversight ofallmattersunderconsiderationandall Non-executivescancontribute. www.prudential.co.uk AnnualReport2018 Prudential plc 103 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationHow we operate continued Building Directors’ knowledge Induction – new Directors ThetwonewDirectorsappointedduring 2018,MrTurnerandMrsWicker-Miurin, eachreceivedacomprehensiveinduction, tailoredtoreflecttheirexperienceand positionasExecutiveandNon-executive Directorsrespectively. PriortohisappointmentasGroupChief RiskOfficer,MrTurnerwasalong-serving memberofthePrudentialseniorexecutive team,havingmostrecentlyservedas DirectorofGroupFinance.Asaresult ofhispriorroles,MrTurnerwasaregular attendeeofmeetingsoftheRiskandAudit Committeesandhasastrong understandingofthebusinessandits controlenvironment.Thereforehis inductionwasspecificallytailoredtocover thestrategicandoperationalprioritiesof theGroupRiskfunctionandhisroleasa memberoftheBoard,includinghis regulatoryobligations. AsummaryofthegeneralandspecificinductionprogrammeforMrsWicker-Miurinissetoutbelow: General induction programme relevant to new Non-executive Directors Understanding our governance Understanding our business — MeetingswiththeChairmanandGroup — Tailoredbriefingswitheachbusinessunitto ChiefExecutiveseparately — ExplanationoftheGroup’sstrategyand businessplan — ExplanationofPrudential’scorporate structure,BoardandExecutiveCommittee structure — BriefingsonGroupgovernanceframework andkeypolicies — Trainingasneededontherulesand governancerequirementsoftheLondonand HongKongStockExchangesandonfulfilling thestatutorydutiesofaDirector gainacomprehensiveunderstandingofeach oftheirbusinessmodels,productsuites, pricingarrangementsandgovernance structures — TailoredmeetingswithallGroupfunctions — Comprehensivebriefingsontheregulatory environmentinwhichtheGroupoperates — Briefingsontoprisksandinternalcontrols — Inductionbriefingsandtrainingasawhole giveDirectorsanunderstandingofthe interestsoftheGroup’skeystakeholders Role-specific induction programme for Fields Wicker-Miurin — Orientationtotheworkand roleoftheRemuneration Committee — UpdatesoncurrentUK remunerationtopics — MeetingwiththeChair oftheRemuneration Committeetodiscuss theannualcycleof Committeework,itscurrent focusandfocusfor2019 andbeyond MrFalconhascommencedacomprehensiveinductionprogrammefollowinghisappointmenttotheBoardwitheffectfrom7January2019. Continuing development of knowledge and skills During2018,theBoardanditsCommittees receivedanumberoftechnicalandbusiness updatesaspartoftheirscheduledmeetings, providinginformationonexternal developmentsrelevanttotheGroupandon particularproductsoroperations.Belowis anoverviewofhowDirectorsarekept uptodate: — TheBoardholdsanannualstrategy session,whichallowsfordetailed updatesoneachofthebusinessunits anddeepdivesonstrategicdirection andobjectivesfortheGroup; — TheBoardreceivesupdatesonbrand, diversityandinclusion,healthandsafety mattersandcorporateresponsibility activities,usuallyonceayear; — TheBoardreceivesupdatesoncorporate governance,politicalandregulatory developments,andthedynamicsof equityandcurrencymarketsatevery scheduledmeeting; — Over2018,theBoardreceivedtwo specificupdatesontheimpactofthe FRC’srevisedcorporategovernance codehighlightingkeythemesandactions fortheGroup; — InOctober2018,theGrouprana focusedcybersecurityupdatefor membersoftheRiskandAudit Committees,whichwasparticularly aimedatdevelopingtheknowledge oftheNon-executiveDirectors; — InOctober2018,theBoardalsoreceived anupdateaboutdevelopments surroundingEnvironmental,Socialand Governance(ESG)reporting,including climaterelatedrisk; — TheBoardreviewseachbusinessunitin depthatleastonceayearandconducts periodicsitevisitsaspartofthis.In2018, theBoardmetinSingaporeand Washington,DC,USA.Detailsofthe activitiesundertakenonthesevisitsare setoutintheboxonpage100; — TheBoardandtheRiskCommittee receiveregularupdatesonmarket developmentsandkeyrisks,including SolvencyIIandcyberrisk.TheRisk Committeereviewstoprisksonan annualbasisanddeepdivesintospecific topicsinresponsetotheidentificationof keyrisks.Thisreviewcoversthefinancial, operationalandstrategicrisks,whilstalso identifyingandaddressingbusiness environmentandinsuranceriskswithin theGroup.Theidentificationofsuch risksinformtheriskreportingprovided totheCommitteeandtheBoard; — TheRiskCommitteereceivedupdates andtrainingonmattersincludingGeneral DataProtectionRegulation,reputational risksandLIBORdiscontinuationover theyear; — TheAuditCommitteereceivedupdates ondevelopmentsaffectingfinancial reportingandtheworkofaudit committeesgenerally.In2018,this includedfinancialreporting developments,anti-moneylaundering, anti-briberyandcorruption,fraud prevention,whistleblowingandcyber risktraining;and — TheRemunerationCommitteereceives updatesonregulatoryandgovernance developmentsaffectingtheGroup’s remunerationarrangements.In2018, theseincludedtrendswiththeinsurance industryandpeers,trendsfromthe2018 AnnualGeneralMeetingseason, CorporateGovernancereformincluding remunerationandgenderpaygap reporting. AllDirectorshavetheopportunitytodiscuss theirindividualdevelopmentneedsaspart oftheannualBoardeffectivenessreview andDirectorsareaskedtoprovidearecord oftrainingreceivedexternallyonanannual basis.AllDirectorshavetherighttoobtain professionaladviceatPrudential’sexpense. 104 Prudential plc AnnualReport2018 www.prudential.co.uk Further information on Directors Information on a number of regulations and processes relevant to Directors, and how these are addressed by Prudential, is given below. Area Prudential’s approach Rules governing appointment and removal — TheappointmentandremovalofDirectorsisgovernedbytheprovisionsintheArticlesofAssociation(the Articles),theUKCode,theHKCode(asappendedtotheHongKongListingRules(theHKListingRules)) andtheCompaniesAct2006. ‘Senior management’ definition Terms of appointment — TheExecutiveDirectorsaretheseniormanagementpopulationforthepurposesoftheHongKongListingRules. — Non-executiveDirectortenureisshownonpage160. — Non-executiveDirectorsareappointedforaninitialtermofthreeyears,commencingwiththeirelectionby shareholders.From2019,Directors’tenurecommencesfromthedateoftheirinitialappointmenttotheBoard. — SubjecttoreviewbytheNomination&GovernanceCommitteeandre-electionbyshareholders,itwouldbe expectedthatNon-executiveDirectorsserveasecondtermofthreeyears.Aftersixyears,Non-executive Directorsmaybeappointedforafurtheryear,uptoamaximumofthreeyearsintotal.Reappointmentissubject torigorousreviewaswellasre-electionbyshareholders. — TheDirectors’remunerationreportsetsoutthetermsoftheNon-executiveDirectors’lettersofappointment onpage141andthetermsofExecutiveDirectors’servicecontractsonpage160. Time commitment — Atpresent,thetimecommitmentexpectedofaNon-executiveDirectorisapproximately32.5daysperannum. — AllNon-executiveDirectorscurrentlyserveonatleastoneoftheBoard’sprincipalCommittees,whichrequires anadditionalcommitmentoftimedependentontheCommitteeandrole. — Onappointment,allNon-executiveDirectorsconfirmtheyareabletodevotesufficienttimetotheGroup’saffairs tomeetthedemandsoftherole. — AllNon-executiveDirectorsarerequiredtodiscussanyadditionalcommitmentswhichmightimpactthetime whichheorsheisabletodevotetotheirrolewiththeChairmanpriortoaccepting. Independence — TheindependenceoftheNon-executiveDirectorsisdeterminedbyreferencetotheUKCodeandHKListing Rulesasfollows: – ForthepurposesoftheUKCode,throughouttheyear,allNon-executiveDirectorswereconsideredbythe Boardtobeindependentincharacterandjudgementandtohavemetthecriteriaforindependenceassetout intheUKCode;and – AlltheNon-executiveDirectorswereconsideredindependentforthepurposesoftheHKListingRules,and eachNon-executiveDirectorprovidesanannualconfirmationofhisorherindependenceasrequiredunder theHKListingRules. — InaccordancewithUSregulatoryrequirements,PrudentialaffirmsannuallythatallmembersoftheAudit CommitteeareindependentwithinthemeaningoftheSarbanes-Oxleylegislation. — PrudentialisoneoftheUK’slargestinstitutionalinvestors.TheBoarddoesnotbelievethatthiscompromisesthe independenceofthoseNon-executiveDirectorswhoareontheboardsofcompaniesinwhichtheGrouphasa shareholding.TheBoardalsobelievesthatsuchshareholdingsshouldnotprecludetheCompanyfromhavingthe mostappropriateandhighestcalibreNon-executiveDirectors. — TheBoardandNomination&GovernanceCommitteeinparticularconsideredindependenceoftheChairman andMrDaviesbeforeproposingthemforre-election,giventhatbothwillhaveservedontheBoardfornineyears atOctober2019.AfullexplanationofindependenceconsiderationsissetoutintheNomination&Governance CommitteeReport. Audit Committee experience — InrelationtotheprovisionsoftheUKCodeandHKListingRules,theBoardissatisfiedthatMrLawhasrecentand relevantfinancialexperienceandthattheCommitteeasawholehascompetencerelevanttothesectorsinwhich thebusinessoperates.FullbiographiesoftheCommitteemembersincludingexperienceandprofessional qualifications,aresetoutonpages92to94. — TheBoardhasdeterminedthatMrLawqualifiesastheAuditCommitteefinancialexpertundertherequirements ofForm20-F. www.prudential.co.uk AnnualReport2018 Prudential plc 105 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationArea Prudential’s approach Indemnities — SubjecttotheprovisionsoftheCompaniesAct2006,theCompany’sArticlespermittheDirectorsandofficersof theCompanytobeindemnifiedinrespectofliabilitiesincurredasaresultoftheiroffice. — Suitableinsurancecoverisinplaceinrespectoflegalactionagainstdirectorsandseniormanagersofcompanies withintheGroup. — Qualifyingthird-partyindemnityprovisionsarealsoavailableforthebenefitoftheDirectorsoftheCompanyand certainothersuchpersons,includingcertaindirectorsofothercompanieswithintheGroup. — Qualifyingpensionschemeindemnityprovisionsarealsoinplaceforthebenefitofcertainpensiontrustee directorswithintheGroup. — Theseindemnitieswereinforceduring2018andremainso. Significant contracts — AtnotimeduringtheyeardidanyDirectorholdamaterialinterestinanycontractofsignificancewiththe Companyoranysubsidiaryundertaking. 106 Prudential plc AnnualReport2018 www.prudential.co.uk How we operate continuedRisk management and internal control Risk management AkeycomponentoftheManualisthe GroupRiskFramework,whichrequires allbusinessunitstoestablishprocesses foridentifying,evaluatingandmanaging therisksfacingthebusiness. TheBoarddeterminesthenatureand extentoftheprincipalrisksitiswillingto takeinachievingitsstrategicobjectives. IthasdelegatedauthoritytotheRisk CommitteetoassisttheBoardinproviding leadership,directionandoversightofthe Group’soverallriskappetite,risktolerance andstrategy,overseeingandadvising onthecurrentandpotentialfuturerisk exposuresoftheGroup,reviewingand approvingtheGroup’sriskmanagement framework,includingchangestorisklimits withintheoverallBoardapprovedrisk appetite,monitoringtheeffectiveness oftheriskmanagementframeworkand adherencetothevariousriskpolicies. Regularactivitiesaredetailedinthe reportonpages124to127. TheGroup’sriskgovernance arrangements,whichsupporttheBoard, theRiskCommitteeandtheAudit Committee,arebasedontheprinciples ofthe‘threelinesofdefence’model: risktakingandmanagement,riskcontrol andoversight,andindependentassurance. First line of defence (risk taking and management) — Takesandmanagesriskexposures inaccordancewiththeriskappetite, mandateandlimitssetbytheBoard; — Identifiesandreportstherisksthat theGroupisexposedto,andthose thatareemerging; — Promptlyescalatesanylimitbreaches oranyviolationsofriskmanagement policies,mandatesorinstructions; — Identifiesandpromptlyescalates significantemergingriskissues;and — Managesthebusinesstoensurefull compliancewiththeGrouprisk managementframeworkassetoutin theManual,whichincludestheGroup RiskFrameworkandriskpoliciesaswell asapprovalrequirements,amongother requirements. Second line of defence (risk control and oversight) — AssiststheBoardtoformulateandthen implementtheapprovedriskappetite andlimitframework,riskmanagement plans,riskpolicies,riskreportingand riskidentificationprocesses;and — Reviewsandassessestherisk-taking activitiesofthefirstlineofdefence, whereappropriatechallengingthe actionsbeingtakentomanageand controlrisksandapprovingany significantchangestothecontrols inplace. Third line of defence (independent assurance) — Providesindependentassurance onthedesign,effectivenessand implementationoftheoverallsystem ofinternalcontrol,includingrisk managementandcompliance. Formal review of controls Aformalevaluationofthesystemsof internalcontrolandriskmanagement iscarriedoutatleastannually.Priorto theBoardreachingaconclusiononthe effectivenessofthesystemsinplace,the fullreportisconsideredbytheDisclosure CommitteeandAuditCommittee,with risk-specificdisclosureswithinthereport alsoreviewedbytheRiskCommittee. Thisevaluationtakesplacepriortothe publicationoftheAnnualReport. Aspartoftheevaluation,thechief executiveandchieffinancialofficer ofeachbusinessunit,includingGroup HeadOffice,certifycompliancewith theGroup’sgovernancepoliciesand theriskmanagementandinternalcontrol requirements.TheGroupRiskfunction facilitatesareviewofthemattersidentified bythiscertificationprocess.Thisincludes theassessmentofanyriskandcontrol issuesreportedduringtheyear,riskand controlmattersidentifiedandreportedby theotherGroupoversightfunctionsand thefindingsfromthereviewsundertaken byGroup-wideInternalAudit,which carriesoutrisk-basedauditplansacross theGroup.Issuesarisingfromanyexternal regulatoryengagementarealsotaken intoaccount. TheBoardisresponsibleforensuringthat anappropriateandeffectivesystemof internalcontrolandriskmanagementis inplaceacrosstheGroup.Theframework ofriskmanagementandinternalcontrols centresoncleardelegatedauthoritiesto ensureBoardoversightandcontrolof importantdecisions.Theframeworkis underpinnedbytheGroupCodeof BusinessConduct,whichsetsoutthe ethicalstandardstheBoardrequiresof itself,employees,agentsandothers workingintheGroup.Theframeworkis designedtomanageratherthaneliminate theriskoffailuretoachievebusiness objectives,andcanonlyprovide reasonableandnotabsoluteassurance againstmaterialmisstatementorloss. Internal control TheGroupGovernanceManual (theManual)setsoutdelegatedauthorities andestablishestherequirementsfor subsidiariestoseekapprovalsfromor reporttoGroupHeadOffice.Group-wide standardsareestablishedthroughpolicies andothergovernancearrangements. Thesepoliciesarealsoincludedwithinthe Manual.Internalcontrolsandprocesses, basedontheprovisionsestablishedinthe Manual,areinplaceacrosstheGroup. Theseincludecontrolscoveringthe preparationoffinancialreporting.The operationofthesecontrolsandprocesses facilitatesthepreparationofreliable financialreportingandthepreparationof localandconsolidatedfinancialstatements inaccordancewiththeapplicable accountingstandards,andrequirements oftheSarbanes-OxleyAct.Thesecontrols includecertificationsbythechiefexecutive andchieffinancialofficerofeachbusiness unitwithrespecttotheaccuracyof informationprovidedforuseinpreparation oftheGroup’sconsolidatedfinancial reporting,andtheassuranceworkcarried outinrespectofUSreportingrequirements. TheBoardhasdelegatedauthoritytothe AuditCommitteetoreviewtheframework andeffectivenessoftheGroup’ssystems ofinternalcontrol.TheAuditCommittee issupportedinthisresponsibilitybythe assuranceworkcarriedoutbyGroup-wide InternalAuditandtheworkofthebusiness unitauditcommittees,whichoverseethe effectivenessofcontrolsineachrespective businessunit.DetailsofhowtheAudit Committeeoverseestheframeworkof controlsandtheireffectivenessonan ongoingbasis,issetoutmorefullyinthe reportonpages115to123. www.prudential.co.uk AnnualReport2018 Prudential plc 107 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationRisk management and internal control continued Board Board Nomination & Governance Committee Remuneration Committee Risk Committee Audit Committee Executives 1 s t l i n e o f d e f e n c e 2 n d l i n e o f d e f e n c e 3 r d l i n e o f d e f e n c e Chief Executive Committee Group Chief Executive Group Executive Committee Group Asset and Liability Committee Balance Sheet & Capital Management Committee Chief Financial Officer Management Group Regulatory Director Group Chief Risk Officer Group Executive Risk Committee Sub-committees Group Finance Group Compliance Chief Security Information Office Group Security Group Risk Group-wide Internal Audit Board-levelcommittees Executivepersonnel Exec/Managementcommittees GHOfunctions Directreportingline Regularcommunicationandescalation Forthepurposesoftheeffectiveness review,theGrouphasfollowedtheFRC GuidanceonRiskManagement,Internal ControlandRelatedFinancialandBusiness Reporting.Inlinewiththisguidance, thecertificationprovidedabovedoes notapplytocertainmaterialjointventures wheretheGroupdoesnotexercise fullmanagementcontrol.Inthesecases, theGroupsatisfiesitselfthatsuitable governanceandriskmanagement arrangementsareinplacetoprotectthe Group’sinterests.However,therelevant Groupcompanywhichispartytothejoint venturemust,inrespectofanyservices itprovidesinsupportofthejointventure, complywiththerequirementsofthe Group’sinternalgovernanceframework. Effectiveness of controls InaccordancewithprovisionC.2.3ofthe UKCodeandprovisionsC.2.1andC.2.2 oftheHKCode,theBoardreviewedthe effectivenessandperformanceofthe systemofriskmanagementandinternal controlduring2018.Thisreviewcovered allmaterialcontrols,includingfinancial, operationalandcompliancecontrols, riskmanagementsystems,budgetsandthe adequacyoftheresources,qualifications, experienceofstaffoftheGroup’s accounting,internalauditandfinancial reportingfunctions.Thereviewidentified anumberofareasforimprovement, particularlyinrespectofthegeneralIT controlenvironment,andthenecessary actionsthathavebeenorarebeingtaken. TheAuditCommitteesatGroupand subsidiarylevelcollectivelymonitor outstandingactionsregularlyandensure sufficientresourceandfocusisinplace toresolvethemwithinareasonable timeframe. TheBoardconfirmsthatthereisanongoing processforidentifying,evaluatingand managingthesignificantrisksfacedbythe Group,whichhasbeeninplacethroughout theperiodanduptothedateofthisreport, andconfirmsthatthesystemremains effective. 108 Prudential plc AnnualReport2018 www.prudential.co.uk Committee reports The principal Board Committees are the Nomination & Governance, Audit, Risk and Remuneration Committees. These Committees form a key element of the Group governance framework, providing effective independent oversight of the Group’s activities by the Non-executive Directors. Each Committee Chair provides an update to the Board on the matters covered at each Committee meeting, supported by a short written summary. Nomination & Governance Committee report Dear Shareholder Thisreporthighlightssomeofthekeyareas offocusconsideredbytheCommittee during2018. Ongoing succession planning TheCommittee’smainroleisensuringthat theBoardretainsanappropriatebalance ofskillstosupportthestrategicobjectives oftheGroupandmaintainsarigorousand transparentapproachtotheappointment ofDirectors. In2018wewelcomedtwoDirectorsto theBoard.MrTurnerwasappointedasan ExecutiveDirectorandGroupChiefRisk OfficerinMarch,aninternalappointment tosucceedPennyJames. AnewNon-executiveDirector, MrsWicker-Miurin,wasappointedin Septemberfollowinganextensivesearch. FullbiographicaldetailsforbothMrTurner andMrsWicker-Miurincanbefoundon pages90and94. Followingtheyearend,wealsowelcomed MrFalcontotheBoardinJanuary2019 followingMrStowe’sretirementas ChairmanandChiefExecutiveofour NorthAmericanBusinessUnit. Weviewsuccessionasongoing– ourplanningforbothExecutiveand Non-executiverolesincludesemergency coveraswellaslonger-termoptions. Demerger Asignificantpartofoursuccessionplanning thisyearwasfocusedondeterminingthe bestmixofskillsfortheBoardforpost demerger. ThenewstructureoftheBoardwillinclude MrWells,MrFitzPatrickandMrTurneras ExecutiveDirectors.Wetookthedecision thatourbusinessunitchiefexecutives wouldstepdownfromtheirBoardroles althoughtheywillcontinuetoattend relevantpartsofBoardmeetings.Weare makingthatchangetoourBoardfromthe AnnualGeneralMeetingthisyear,and accordinglyMrFalcon,MrNicandrouand MrFoleywillnotstandforelectionor re-electioninMay2019. Sincetheannouncementofourintention todemergeM&GPrudential,theCommittee hashadtooverseesomeelementsof establishingtheM&GPrudentialboard.The Committeeinterviewedandrecommended, withtheinputoftheM&GPrudentialchief executive,theappointmentofMikeEvans totheM&GPrudentialboard,anddetails wereannouncedon1October.The CommitteehasassistedMikeEvansinthe searchforsuitablenon-executivestojoin theM&GPrudentialboard. TheCommitteealsoconsideredsuccession planninginrespectofmyroleasChairman oftheBoard.Aseparatepartofthissection providesanupdatefromPhilipRemnant, ourSeniorIndependentDirectoron thismatter. Diversity Althoughimprovinggenderdiversityat Boardlevelhasreceivedagreatdealof theCommittee’sattention,thisremains achallengeandonewhichtheCommittee isfocusingon.Genderdiversityisan importantfactorinidentifyingcandidates forBoardlevelsuccessionandthereis moreworktobedoneacrossbuilding ourinternalpipeline,ensuringexternal recruitmentisproducingadiversepool andappointingatBoardlevel. TheCommittee’stermsofreferencewere updatedtoformaliseitsroleindeveloping adiversepipelineandexpandingitsrole inreviewingandmonitoringdiversity initiativesacrosstheGroupasawhole. Paul Manduca Chair of the Nomination & Governance Committee Committee members — PaulManduca(Chair) — HowardDavies — DavidLaw — AnthonyNightingale — PhilipRemnant Regular attendees — GroupChiefExecutive — GroupHumanResourcesDirector — GroupGeneralCounseland CompanySecretary Number of meetings in 2018: Three. www.prudential.co.uk AnnualReport2018 Prudential plc 109 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationCommittee reports continued Committee governance Followingthepublicationoftherevised UKCorporateGovernanceCodein July2018theCommitteereviewedand recommendedanumberofamendments toitstermsofreferenceinordertoalign themwiththenewCodeandevolving governancebestpractice. TheCommitteealsoconducteditsusual reviewsofgovernancearrangementsofthe Group’sMaterialSubsidiaries,including thereviewofperformanceofeachMaterial Subsidiaryboard,theirtermsofreference andthereviewoftheongoingappointments oftheindependentnon-executive directorsandchairsofthoseboards. AsChairoftheCommittee,Ihave responsibilityforensuringtheCommittee operateseffectively.Inordertoenable theCommitteetoprovideconstructive challengetomanagement,Iencourage opendebateandcontributionsfromall Committeemembers. AspartoftheBoard’seffectivenessreview, describedinmoredetailonpages99and 100,theCommitteewasfoundtobe operatingeffectively. How the Committee spent its time during 2018 Year end matters, re-election and tenure Reviewexternalpositions,conflictsofinterestsandindependence,timecommitment,tenureandterms ofappointment ReviewperformanceofChairmanandNon-executiveDirectors ReviewrelevantdisclosuresintheAnnualReportandAccounts RecommendelectionofDirectorsbyshareholders Succession planning, diversity and appointments Chairman Non-executiveDirectors GroupChiefExecutive ExecutiveDirectors GroupExecutiveCommitteecomposition Governance MembershipreviewofprincipalBoardCommittees Committeetermsofreference Demergergovernancearrangements Groupgovernanceframework Material Subsidiary governance Subsidiaryboardcomposition,non-executivesuccessionplanningandappointments TermsofreferenceforMaterialSubsidiaryboards,chairsandcommittees MaterialSubsidiarygovernancemanual MaterialSubsidiaryboard,chairanddirectorevaluations AppointmentofM&GPrudentialchair(notaMaterialSubsidiary) Feb Jun Oct l l l l l l l l l l l l l l l l l l l l l l l 110 Prudential plc AnnualReport2018 www.prudential.co.uk Report from Philip Remnant, Senior Independent Director Philip Remnant Senior Independent Director Successionplanningfortheroleof ChairmanoftheBoard,onwhichIlead, isconsideredbytheCommitteeona regularbasis.Wereviewthenecessary skillsandexperiencerequiredforthe effectiveleadershipoftheBoardofan internationalfinancialservicesgroup. Thisyear,wealsohadtoconsidertwo majorchanges:therevisedUKCode which,underthecomplyorexplain principle,setsoutthatthetenureof thechairmanofalistedcompany shouldbenomorethannineyears fromfirstappointmenttotheboard, andourdemerger. MrManduca’sappointmenttothe BoardwasinOctober2010,meaning theCodewouldprescribehisretirement inOctober2019. Atatimeofsubstantialchangeforthe Group,theBoardconsidersthatitwould bedisruptiveforMrManducatostand downduringthedemergerprocess. TheBoardbelievesthatshareholderswill benefitfromacommittedandengaged ChairmantoleadtheGroupthroughthe transactionandtoremaininroleforsome periodoftimethereaftertoensure continuingstronggovernanceinthe PrudentialGrouppost-demerger.Itis currentlyintendedthatMrManduca wouldstanddownasChairmaninMay 2021,subjecttoannualre-electionupto thatdate. Wearethereforeproposingthat MrManducastandforelectionas Chairmanatourforthcoming2019 AnnualGeneralMeeting. Beforetakingthisdecision,weconsulted withanumberofourinvestorsto obtaintheirviewsandtakethem intoaccountinourdecision-making. Shareholdersrespondedpositivelyto thespecificengagementonthistopic andweresupportiveofMrManduca’s extendedtenure. Theprocessforidentifyingcandidates tosucceedMrManducawillcommence in2020,Iwillleadthisprocess,assisted bytheCommittee. Key matters considered during the year Matter considered How the Committee addressed the matter Succession planning Boardcomposition Throughouttheyear,theCommitteekeptsuccessionplansforallExecutiveandNon-executive Boardrolesunderreview. SuccessionplansaresupportedbytheyearendBoardevaluationandindividualperformance evaluationswhichhelpinformtheCommittee’srecommendations. TheCommitteetakesaccountofthesize,structureandcompositionoftheBoardandits Committees,includingexistingknowledge,experienceanddiversity.Indoingso,theCommittee considerstheGroup’sstrategicneedsandanticipatesfutureneeds,skillsandexperience. TheCommitteeisinvolvedfromthestartwhenavacancyoragapintheBoard’sskillsisidentified. LedbytheChairman,andworkingwiththeGroupChiefExecutiveandHumanResourcesDirector, arolespecificationisprepared.ThiswilltakeintoaccountfeedbackfromtheCommitteeandthe Group’sDiversityandInclusionPolicy.Oncethespecificationisagreed,specialisttalentagenciesare typicallyengagedtocreateashortlistofcandidateswhichisreviewedbytheCommitteeandother stakeholders.InterviewswithindividualsthentakeplacewithselectedCommitteemembersand feedbackisprovidedtoallmembers.Inthismanner,apreferredcandidateisselectedandthe CommitteethenrecommendstheindividualtotheBoardforappointment(subjecttoregulatory approvalwhererequired). Contemporaneouslywiththisprocess,duediligencechecksareundertakenonthecandidateand Prudentialliaiseswiththerelevantregulatoryauthoritiesforanyapprovalsneeded.TheCommittee iskeptupdatedonthisprocessasnecessary. Thisyear,theCommitteehasconsideredBoardcompositionandsuccessionplanninginthecontext ofthedecisiontodemergeM&GPrudentialfromthePrudentialGroup,andtookthedecisionin February2019torecommendthatthecurrentchiefexecutivesofthebusinessunitswouldstep downattheforthcomingAnnualGeneralMeeting.TheBoardwasinunanimousagreementthat underthepost-demergerstructure,effectiveoversightofthebusinessunitscanbemaintained withoutthebusinessunitchiefexecutivesbeingplcBoardmembers. www.prudential.co.uk AnnualReport2018 Prudential plc 111 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationCommittee reports continued Key matters considered during the year continued Matter considered How the Committee addressed the matter Non-executiveDirectors Duringtheyear,theCommitteefinalisedtheappointmentofMrsWicker-MiurinasaNon-executive Director.TheCommitteewassupportedinthesearchforcandidatesbytheMilesPartnership. ThenumberofNon-executiveDirectorsrequiredontheBoardisconsideredonaregularbasis, andthisyearparticularlyinthecontextofthesmallerGrouppost-demerger. TheCommitteeusesaregularlyrefreshedskillsmapforNon-executivesuccessionplanning. Theskillsmapidentifiesskillsandexperiencebysector,geographyandtechnicalskills,whichare desirablefortheBoardasawhole,takingaccounttheGroup’sstrategicdirection. FullbiographicaldetailsofeachNon-executiveDirector,includingasummaryoftheskillsand experienceattributabletothemwhichhavebeenidentifiedasimportanttotheGroup’slong-term sustainablesuccess,aresetoutonpages92to94. ExecutiveDirectorsand seniorexecutives TheCommitteecarriedoutitsannualreviewofthesuccessionplansinplacefortheGroupChief Executive,otherExecutiveDirectorsandGroupExecutiveCommittee(GEC)roles. Useofsearchconsultancies ElectionofDirectors TheCommitteedirectedthedevelopmentandrenewaloftheseplansthroughtheGroupHR Director,supportedbyEgonZehnderinthecaseoftheGroupChiefExecutiveplanandbyTalent IntelligencefortheotherExecutiveDirectorrolesandGECmembers.In2017,TalentIntelligence preparedlong-listsandshort-listswithafocusongenderandethnicdiversityrequirements. TheCommitteehasoversightofseniorexecutivelevelsuccessionplanningandthetalentpipeline. TheCommitteediscussedtheseplanscloselywiththeGroupChiefExecutivetoidentifybusiness requirementsandplanforfuturesuccessionneedsandgavefeedbackontheplanningprocess. TheCompanyannouncedon12October2018thatMrStowewouldretireasChairmanandChief ExecutiveoftheNorthAmericanBusinessUnitwitheffectfrom31December2018.MrStowe wassucceededinthisrolebyMrFalcon,whojoinedtheBoardon7January2019.MrFalcon’s appointmentwasconsideredinJune2018followingacomprehensivesearch,ledbyKornFerry, withsupportfromSpencerStuart.TheCommitteeconsideredcandidateprofilesandskillsand conductedinterviewsbeforeagreeingtorecommendMrFalcon’sappointmenttotheBoard. FullbiographicaldetailsforMrFalconcanbefoundonpage90. TheMilesPartnershipdoesnothaveanyadditionalconnectionwithPrudential.Inadditiontoacting assearchconsultantforcertainexecutivehires,EgonZehnderalsoprovidessupportforsenior developmentassessments.TalentIntelligencealsoprovidesadditionalsuccessionplanningsupport totheGroupbelowGEClevel. AspartofitsongoingworkonBoardsuccessionplanning,theCommitteeconsideredtheongoing appointmentoftheChairman,CommitteeChairsandNon-executiveDirectors,takingintoaccount timecommitmentandthegeneralbalanceofskills,diversity,experienceandknowledgeonthe Boardandassessinglengthofserviceintheirroles. Particularattentionhasbeenpaidtotherecommendationtore-electMrNargolwalaandSirHoward DaviesattheAnnualGeneralMeetingtobeheldin2019duetotheirlengthofservice.InMrDavies’ case,electionatthe2019AnnualGeneralMeetingwilltakehimthroughtheCode-prescribednine yearsfromdateofappointment.TheBoarddoesnotconsiderthatMrDavies’independencewillbe impactedbyhistenureextendingforsixmonthsbeyondthenine-yearanniversary. WhenmakingrecommendationsforDirectorstostandforelectionattheAnnualGeneralMeeting, theCommitteeconsidersindividualDirectors’contributiontoPrudential’slong-termsuccessaswell astheircommitmenttotheroleandotherexternalpositionsordirectorshipswhichmayimpacttheir independenceoravailability. HavingreviewedtheperformanceoftheNon-executiveDirectorsinofficeatthetime,andhaving receivedfeedbackfromtheGroupChiefExecutiveontheperformanceoftheExecutiveDirectors, theCommitteeconcludedthateachDirectorcontinuedtoperformeffectivelyandwasableto devotesufficienttimetofulfiltheirduties.FollowingreviewoftheoutcomesoftheBoardevaluation process,theGroupconsidersthattheNon-executiveDirectorscontinuedtoexhibitappropriate behaviours,contributedeffectivelytodecision-makingandexercisedsoundindependent judgementinholdingmanagementtoaccount. 112 Prudential plc AnnualReport2018 www.prudential.co.uk Key matters considered during the year continued Matter considered How the Committee addressed the matter ElectionofDirectorscontinued ThediversityoftheBoardincludingskillsandexperience,andthecontributionmadebyeach DirectorissetoutintheindividualbiographiesofDirectorsonpages89to94. Diversity DiversityandInclusionPolicy Boardandseniormanagement Group-wide TheCommitteerecommendedtotheBoardthoseDirectorsstandingforelectionattheCompany’s AnnualGeneralMeeting.  TheGrouphasaDiversityandInclusionPolicythataimstoprovideequalopportunitiesforallwho applyandwhoperformworkforourorganisation,includingtheExecutiveandNon-executive Directors,irrespectiveofsex,race,age,ethnicorigin,educational,socialandculturalbackground, maritalstatus,pregnancyandmaternity,civilpartnershipstatus,anygenderreassignment,religion orbelief,sexualorientation,disability,orparttime/fixedtermwork.TheCommitteekeepsthisunder reviewacrossallitsrecruitmentplanning. GiventheglobalreachoftheGroup’soperations,itsbusinessstrategyandlong-termfocus,theBoard makeseveryefforttoensureitisabletorecruitDirectorsfromdifferentbackgrounds,withdiverse experience,perspectiveandskills.ThisdiversitynotonlycontributestowardsBoardeffectiveness butisessentialforsuccessfullydeliveringthestrategyofaninternationalgroup. TheBoardiscommittedtorecruitingthebestavailabletalentandappointingthemostsuitable candidateforeachrole,whileatthesametimeaimingfor,appropriatediversityontheBoard. InDecember2018theBoardapprovedchangestotheCommittee’stermsofreferencetoformalise itsresponsibilityforoverseeingthedevelopmentofadiversepipelineforBoardandothersenior executives.Thiswillincludeensuringthatplansarebasedonmeritagainstobjectivecriteriaand promotediversityacrossgender,socialandethnicbackgroundandcognitiveandpersonal strengths. InthecaseofBoardappointments,theCommitteewillconsiderrelevantresultsoftheannualBoard effectivenessevaluationandensuresuggestedenhancementstotheBoardareaddressed. TheBoardconsidersthatitsdiversityofexperience,skillsetandprofessionalbackgroundhas increasedasaresultofBoardlevelsuccessionin2018. InDecember2018theBoardapprovedchangestotheCommittee’stermsofreferencetoinclude responsibilityforperiodicallyreviewinganyobjectivesfortheimplementationofdiversityforthe Groupasawholeandmonitoringtheimpactofdiversityinitiatives. In2016theBoarddecidedtosigntheHMTreasuryWomeninFinanceCharter.In2018theGroup achieveditscommitmenttohave27percentwomeninseniormanagementroles,ayearearlier thanthetargetdateoftheendof2019.TheGroupcontinuestoworktowardsachievingatleast 30percentofwomeninseniormanagementbytheendof2021. ThebusinessunitsalsoengagedinanumberoftargetedactivitiesinsupportoftheGroup’sDiversity andInclusionPolicy,includingawarenesstrainingofunconsciousbias. UpdatesonactivitiesrelatingtothediversityacrosstheGroupareprovidedtotheBoardperiodically. TheGroup’sactivitiesinthisrespectaredescribedinourcorporateresponsibilityreviewonpages70 to86. Governance ReviewofprincipalCommittee membership  TheCommitteeregularlyreviewsthemembershipofallprincipalCommitteesandmakes recommendationstotheBoardasappropriate.RecommendationsonCommitteemembership aretakenafterconsultationwiththeChairoftherelevantCommittee. Independencecriteria InMarch,theCommitteemadearecommendationthatMsSchroederjointheRiskCommittee, andinOctober,thatMrWatjenjointheRiskCommittee.Theseappointmentsrefreshedexperience, providedsuccessionoptionsandincreaseddiversityontheCommittee. TheCommitteeconsideredtheindependenceoftheNon-executiveDirectorsagainstrelevant requirementsasoutlinedonpage105,takingintoaccounttheamendedCodewhichrequires nine-yeartenuretorunfromthetimeofappointmenttotheboardratherthanfirstelection byshareholders. www.prudential.co.uk AnnualReport2018 Prudential plc 113 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationCommittee reports continued Key matters considered during the year continued Matter considered How the Committee addressed the matter Conflictsofinterest TheBoardconsideredinOctoberandDecember2018thenewCodeprovisionformalisingtheneed forboardstoidentifyandmanageconflictsofinterest.TheBoardhasdelegatedauthoritytothe Committeetoconsider,andauthorisewherenecessary,anyactualorpotentialconflictsofinterest. PriortoproposingDirectorsforre-election,theCommitteeconsideredtheexternalappointments ofallDirectorsandreviewedexistingconflictauthorisations,reaffirmingorupdatinganytermsor conditionsattachedtoauthorisationswhererequired. Inaddition,theCommitteeconsideredtheexternalpositionsofthoseDirectorsappointedduring theyear,notedchangesintheexternalpositionsofexistingDirectorsandconsideredwhetherthese gaverisetoanyconflicts. TheBoardconsidersthattheproceduressetoutabovefordealingwithconflictsofinterest operateeffectively. Subsidiary governance MaterialSubsidiaries  Duringtheyearunderreview,theCommitteecarriedoutvariousdutiesrelatedtotheMaterial Subsidiaries: M&GPrudential — Successionplanningarrangementsfornon-executivedirectors; — EvaluatingtheperformanceoftheMaterialSubsidiaryboards,chairsanddirectors;and — ReviewingMaterialSubsidiarygovernancearrangements,includingprinciplesforattendance atcommitteemeetings,andthetermsofreferencefortheMaterialSubsidiaryboardsandchairs. On1October2018,theCompanyannouncedtheappointmentofMikeEvansaschairof M&GPrudentialwithimmediateeffect.TheCommitteeconsideredandrecommendedthe appointmentofMrEvansaschairoftheM&GPrudentialboard. TheCommitteecontinuestobeinvolvedinsupportingMrEvansinM&GPrudentialboard appointmentswhichareongoing. 114 Prudential plc AnnualReport2018 www.prudential.co.uk Demerger activities In2018theCommitteeconsidereda numberofkeyareasunderitsremitin thecontextofthedemergerprocess includingtheprogressinintegrating thefinancefunctionsofM&Gand PrudentialUK&Europeintoasingle M&GPrudentialteamwithanappropriate controlenvironmentandthecapabilities, processesandsystemstosupportboththe demergeractivityandthefutureambitions oftheM&GPrudentialbusiness. Internal audit During2018theCommitteecontinued toreceiveregularbriefingsfromthe Group-wideInternalAudit(GwIA) Director.GwIAundertookaprogrammeof risk-basedauditscoveringmattersacross thebusinessunitsinadditiontoassurance workonsignificantchangeprogrammes. Deliveryoftheinternalauditplanandthe independentassuranceprovidedbyGwIA representimportantcomponentsofthe Committee’soversightoftheGroup’s internalcontrolsprocedures.The effectivenessofGwIAwasassessedduring theyear,togetherwithareviewofprogress againstsuggestedenhancements identifiedbytheexternalreview undertakenbyDeloittein2017.Imeet regularlywiththeGwIADirectortodiscuss theworkdoneandmattersarisingandthe Committeealsoaskedthatmanagement responsibleforrectifyingsomeofthe issuesidentifiedtoattendtheCommittee toensurethatappropriateactionwasbeing taken.TheCommitteealsoapprovedthe 2019internalauditplanwhichtakes accountofthebusinessandorganisational changesarisingfromtheplanned demerger.TheworkhighlightedGwIA’s roleinsupportingthedemergerandthe creationoftwoappropriatelysized, resourcedandexperiencedindependent internalauditfunctions. Audit Committee report Dear Shareholder AsChairoftheAuditCommittee, Iampleasedtopresentthisreporton theCommittee’sactivitiesduring2018. TheCommitteeprovidestheBoardwith assuranceastotheintegrityoftheGroup’s financialreportingand,togetherwith theRiskCommittee,monitorsthe effectivenessofthesecondandthirdlines ofdefence,whichareanintegralpartof ourinternalcontrolenvironment. WithregardtotheGroup’sfinancial reporting,theCommittee’sworkis focusedonensuringappropriatefinancial accountingpoliciesareadoptedand implementedandonassessingkey judgementsanddisclosures.The introductionoffinancialaccounting standardIFRS17,whichisnowanticipated tocomeintoeffectin2022,willbea significantchallengeandchangeandas aconsequencetheCommitteereceived updatesduring2018ontheGroup’s progresstowardsitsimplementation. External auditor AnimportantpartoftheCommittee’s workconsistsofoverseeingtheGroup’s relationshipwithKPMGLLP(KPMG), includingsafeguardingindependence, approvingnon-auditfeesandsatisfying itselfthatitisinthebestinterestsof shareholderstorecommendthe reappointmentofKPMG.Followingthe publicationoftheFRC’sAuditQuality InspectionreportforKPMGinJune2018, IandtheGroupFinanceDirectormetwith KPMG’sleadershipandtheCommittee discussedtheactionstheirfirmistaking toimprovequality.Wealsoreviewedthe assessmentoftheauditofPrudentialand introducedchangestoenhanceourauditor effectivenessmonitoringprocess. ItremainstheCommittee’scurrentview that,withoutexceptionalcircumstances, changetothecurrentauditorshouldnot occurduringaperiodofsignificantchange forPrudential.Itisthereforethe Committee’sintentiontoappointanew auditorforthe2023financialyear-end, afterthefirstyearofimplementationofthe newinsuranceaccountingstandard.Aplan toidentifyKPMG’ssuccessortoensurea smoothtransitionhasbeendeveloped. FurtherexplanationoftheCommittee’s approachissetoutinthisreport. David Law Chair of the Audit Committee Committee members — DavidLaw(Chair) — HowardDavies — PhilipRemnant — AliceSchroeder — LordTurner Regular attendees — ChairmanoftheBoard — GroupChiefExecutive — ChiefFinancialOfficer — GroupChiefRiskOfficer — DirectorofGroupFinance — DirectorofGroupFinancial Accounting&Reporting — GroupRegulatoryandGovernment RelationsDirector — GroupGeneralCounseland CompanySecretary — DirectorofGroupCompliance — DirectorofGroup-wide InternalAudit — ExternalAuditPartner Number of meetings in 2018: Nine.(Inaddition,ajointmeetingwas heldwiththeRiskCommittee) www.prudential.co.uk AnnualReport2018 Prudential plc 115 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationCommittee reports continued Compliance TheCommitteereceivedupdateson mattersarisingfromtheannualCompliance Plan(thePlan)throughout2018.ThePlan focusedonanumberofareastohelp strengthenthecomplianceframework, whichisintendedtoaidtheGroupin meetingregulatoryobligations,including monitoringcompliancewithkeyelements ofthecomplianceframeworksuchas conflictsofinterest,anti-moneylaundering andanti-briberyandcorruptionpolicies. TheCommitteealsoapprovedthe2019 CompliancePlaninthecontextofthe proposeddemerger,andismonitoring relevantaspectsoftheproposedtransition ofPrudential’sleadregulatorfromthe PrudentialRegulatoryAuthoritytothe HongKongInsuranceAuthority(IA). Committee governance TheCommitteeworkscloselywiththeRisk CommitteetomakesurebothCommittees areupdatedandalignedonmattersof commoninterest.Whereresponsibilities areperceivedtooverlapbetweenthetwo Committees,SirHowardandIagreethe mostappropriateCommitteetoconsider thematter.InOctober2018thetwo Committeesheldajointsessiononcyber security,includingupdatesonthe Group-widecybersecuritystrategyand informationsecurityprogramme,more detailsofwhicharesetoutintheRisk Committeereportonpages124and125. How the Committee spent its time during 2018 Financial reporting and external auditor Periodicfinancialreportingincluding: — Fullandhalf-yearlyreportandaccounts — Keyaccountingjudgementsanddisclosures,includingtax — SolvencyIIresultsandgovernanceprocesses — Associatedauditreports Auditplanning,fees,independence,effectivenessandreappointment Environmental,socialandgovernancereporting Internal control framework Internalcontrolframeworkincludingeffectiveness Internal audit Statusupdatesandeffectiveness Internalauditplan Compliance Statusupdates Complianceplan Financial crime and whistleblowing Financialcrimepreventionandwhistleblowing–regularupdates Governance and reporting MaterialSubsidiariesupdates Internalgovernanceframeworkincludingeffectiveness Businessunitauditcommitteeeffectivenessandtermsofreference Committeetermsofreferenceandeffectiveness Note 1 TwomeetingswereheldineachofMarchandOctober2018. AsChairoftheCommittee,Ihave responsibilityforensuringtheCommittee operateseffectively.Inadvanceofeach Committeemeeting,Ispeaktothechairsof ourMaterialSubsidiaryauditcommittees andreporttothefullBoardaftereach Committeemeetingonthemainmatters discussed.Wehavealsoheldprivate sessionsasaCommitteetodiscuss performanceandalsowiththeGroup’s ResilienceDirectortodiscuss whistleblowingcasesandtheirresolution andhadprivatediscussionswithGwIA andKPMG.Anannualreviewofour effectivenesswascarriedoutaspartofthe Boardevaluation,describedinmoredetail onpage100.TheCommitteewasfoundto befunctioningeffectively. Feb Mar1 May Jul Aug Oct1 Dec l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l 116 Prudential plc AnnualReport2018 www.prudential.co.uk Key matters considered during the year Matter considered How the Committee addressed the matter Financial reporting and tax Overview OneoftheCommittee’skeyresponsibilitiesistomonitortheintegrityofthefinancialstatements andanyotherperiodicfinancialreporting.Duringthelastyear,itemsreviewedbytheCommittee includedthe2017AnnualReportandAccounts,the2017SolvencyandFinancialConditionReport andassociatedPillar3returnssubmittedtotheGroup’sregulator,the2017Environmental,Social andGovernanceReport,the2017TaxStrategyReport,the2018HalfYearReportandAccounts, andthekeyaccountingjudgementsforthe2018AnnualReport. Inreviewingtheseandotheritems,theCommitteereceivedreportsfrommanagementand,as appropriate,reportsfrominternalandexternalassuranceproviders,whichinsomecaseswere providedattheexplicitrequestoftheCommittee. WhenconsideringfinancialreportingtheCommitteeassessescompliancewithrelevantaccounting standards,regulationsandgovernancecodes.During2018,theGroupadoptedIFRS15‘Revenue fromcontractswithcustomers’and,asdescribedinnoteA2,thishadnomaterialeffectonthe Group’sfinancialresults.TheCommitteealsoreviewedthepotentialimpactofaccountingstandards thatareeffectiveinthefuture,includingIFRS16’Leases’andIFRS17‘InsuranceContracts’.The approachtoadoptingthesestandardsisfurtherdiscussedinnoteA2.TheCommitteerequested regularupdatesfrommanagementontheprogressagainstplansforimplementingIFRS17givenits particularsignificance. Thefollowingsectionssetoutthekeyassumptions,judgementsandothermattersconsidered aspartoftheirreviewofthe2018AnnualReportandAccounts. Keyassumptionsandjudgements TheCommitteereviewedthekeyassumptionsandjudgementsincludingthosemadeinvaluing theGroup’sinvestments,insuranceliabilitiesanddeferredacquisitioncostsunderIFRS,together withreportsontheoperationofinternalcontrolstoderivetheseamounts.Italsoreviewedthe assumptionsunderpinningtheGroup’sEuropeanEmbeddedValue(EEV)metrics. Assumption setting ThemeasurementofinsuranceliabilitiesandEEVarebasedonestimatesoffuturecashflows, includingthosetoandfrompolicyholders,overalongperiodoftime.Theseestimatescan, dependingonthetypeofbusiness,behighlyjudgemental.TheCommitteeconsideredchanges toassumptionsandotherestimatesusedtoderiveIFRSinsuranceliabilitiesandtheGroup’sEEV. Peerbenchmarkingwasconsideredwhereavailable.Thekeyassumptionsreviewedwere: — Persistency,mortality,morbidity(includinginrelationtomedicalinflation)andexpense assumptionswithintheAsialifebusinesses; — Policyholderbehaviourassumptions(includingmortality)affectingthemeasurementofJackson guaranteedliabilities(seenoteC4.2(b)oftheIFRSfinancialstatementsandnote14totheEEV basisresults);and — Mortality,expenseandcreditriskassumptionsfortheUKannuitybusiness.Mortality assumptionscontinuedtobeanareaoffocusgivenongoinganalysisofhistoricexperience, (seenoteC4.1(d)totheIFRSfinancialstatements). TheCommitteewassatisfiedthattheassumptionsadoptedbymanagementwereappropriate. Furtherinformationontheeffectsofmaterialchangestoinsuranceassetsandliabilitiesisincluded innoteB3totheIFRSfinancialstatementsandnote14oftheEEVbasisresults. Goodwill and other intangible assets including deferred acquisition costs (DAC) TheCommitteereceivedinformationtoenableittoreviewthemorematerialintangibleasset balances.ThisincludedtherecoverabilityandamortisationoftheDACbalanceintheUSand whethertherehadbeenanyindicationofimpairmentoftheGroup’sdistributionrightsassets. TheCommitteewassatisfiedthattherewasnoimpairmentoftheGroup’sintangiblesat 31December2018.FurtherinformationiscontainedinnoteC5oftheIFRSfinancialstatements. Investments TheCommitteereceivedinformationonthecarryingvalueofinvestmentsintheGroup’sbalance sheetincludingonthoseassetswhicharehardertovalueanddataontheapplicationoftheGroup’s IndependentPriceVerificationpolicy.ThisdatashowedthatthemajorityoftheGroup’sassetswere markedtomarketusingtwoindependentprices,reducingthelevelofjudgementappliedininvestment valuation.FurtherinformationonthevaluationofassetsiscontainedinnoteC3oftheIFRSfinancial statements.TheCommitteesatisfieditselfthatoverallinvestmentswerevaluedappropriately. www.prudential.co.uk AnnualReport2018 Prudential plc 117 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationCommittee reports continued Key matters considered during the year continued Matter considered How the Committee addressed the matter Otherfinancialreportingmatters andtaxreporting Provisions TheCommitteeregularlyreviewstheGroup’sprovisions,includingthelevelofprovisioningfor regulatoryandlitigationmattersandprovisionsforcertainopentaxitemsincludingtaxmattersin litigation.TheCommitteewassatisfiedthatthelevelofprovisioningadoptedbymanagementwas appropriate.SeenoteC11oftheIFRSfinancialstatements. Going concern and viability statements TheCommitteeconsideredvariousanalysesfrommanagementregardingGroupandsubsidiary capitalandliquiditypriortorecommendingtotheBoardthatitcouldconcludethatthefinancial statementsshouldcontinuetobepreparedonthegoing-concernbasis(seepage128),andthatthe disclosuresontheGroup’slonger-termviability(seepage68)werebothreasonableandappropriate. TheCommitteeconsideredinformationontheriskstotheGroup’sliquidityandcapitalpositionas wellastheimpactoftheproposeddemergerandthescenariosthatcouldariseaspartoftheUK’s intendedwithdrawalfromtheEU. Alternative performance measures TheCommitteereviewedthealternativeperformancemeasurescontainedintheGroup’sStrategic Report.ItconsideredtheconsistencywiththeprioryearandtheprominenceascomparedtoIFRS measuresofperformance. Fair, balanced and understandable requirement TheCommitteecarriedoutaformalreviewofwhethertheAnnualReportandAccountswere‘fair, balancedandunderstandable’asrequiredbytheUKCorporateGovernanceCode.Inparticular, theyconsideredwhetherthereportgaveafullpictureoftheGroup’sperformanceintheyearwith importantmessagesappropriatelyhighlighted,thelevelofconsistencybetweenfinancial statementsandnarrativesectionsandwhetherperformancemeasureswereclearlyexplained. Aftercompletionofitsdetailedreview,theCommitteewassatisfiedthat,takenasawhole, theGroup’sAnnualReportandAccountswerefair,balancedandunderstandable. FRC review of 2017 Annual Report and Accounts AsanoutcomeoftheFRC’sregularoversightroleoncompanyreportingthroughitsreviewofthe Group’s2017AnnualReportandAccounts,asmallnumberofdisclosureimprovementshavebeen madeinthe2018financialstatementsofwhichthemostsignificantistodemonstratebetterthe linkagebetweenmovementininsuranceandinvestmentcontractbalancesreportedintheincome statementandthenotes(seenoteC4.1(a)(iii)).TheFRCnotesthatitsreviewwasbasedonthe Group’s2017AnnualReportandAccountsonlyanddoesnotbenefitfromdetailedknowledge oftheGroup’sbusinessoranunderstandingoftheunderlyingtransactions. Parent company financial statements TheCommitteereviewedtheparentcompanyprofitandlossaccountandbalancesheet,which includedrecognitionofapensionsurplusasset,(seenote7oftheParentCompanyfinancial statements). External audit Review of effectiveness, non-audit services and auditor reappointment Externalauditeffectiveness TheGroup’sexternalauditorisKPMGLLP(KPMG)andoversightoftherelationshipwiththemis oneoftheCommittee’skeyresponsibilities.TheCommitteereviewstheeffectivenessoftheaudit throughouttheyeartakingintoaccount: — Thedetailedauditstrategyfortheyearandcoverageofthehighlightedrisks; — Groupmaterialityandhowthatisappliedtotheindividualbusinessunits; — Insightaroundthekeyaccountingjudgements,includingbenchmarking,andthewayKPMG appliedconstructivechallengeandprofessionalscepticismindealingwithmanagement.The CommitteeformallymetwiththeGroupLeadPartnerwithoutmanagementpresentonthree occasionsoverthelastyear; — Theoutcomeofmanagement’sinternalevaluationoftheauditorasdiscussedbelow;and — OtherexternalevaluationsofKPMG,withafocusontheFRC’sAnnualQualityReview. 118 Prudential plc AnnualReport2018 www.prudential.co.uk Key matters considered during the year continued Matter considered How the Committee addressed the matter Externalauditeffectiveness continued Auditorindependence andobjectivity Internal evaluation of KPMG ThiswasconductedusingaquestionnairethatwascirculatedtotheCommitteemembers,Material Subsidiaryauditcommitteemembers,theChiefFinancialOfficerandtheGroup’sseniorfinancial leadershipforcompletion.Thesurveyasked24questionsoverfourcategories(teamperformance, process,communicationandauditexecution)inrelationtothe2017audit.Thedegreeofchallenge androbustnessofapproachtotheauditwerekeycomponentsoftheevaluation. KPMGweregiventheopportunitytorespondtothefindingsinthereport.Asaresultofthereport KPMGproposedenhancementstotheauditandteamandprogressagainstthesechangeswere reportedtotheCommitteeinDecember. FRC’s Annual Audit Quality Review of KPMG DuringJune2018,theFRCpublishedtheprincipalfindingsarisingfromthe2017/18inspection ofKPMGcarriedoutbyitsAuditQualityReviewteam.TheFRCnotedthattherehadbeena deteriorationinqualityatKPMGanditwasplacingthefirmunderincreasedscrutiny.Theaudit ofPrudentialplchadnotbeenreviewedbytheFRCaspartofthe2017/18inspection. AsaresultoftheFRC’sfindingstheCommitteediscussedthefindingsandthefirm’sresponse andquestionedKPMGonhowthoseenhancementswouldbeappliedtothePrudentialplcaudit. ItnotedthegoodpracticeidentifiedbytheFRCinrespectoftheauditofinsuranceliabilitiesandthe seriousnesswithwhichKPMGwereaddressingtheFRC’sfindings.Overall,itwassatisfiedthatthe auditofPrudentialplcremainedeffective.However,inlightofthefindingsitrequestedthatKPMG providecontinuingupdatesonprogressondeliveringtheenhancementsdiscussedandtheitems raisedaspartoftheinternalevaluationofauditeffectiveness.Italsochallengedmanagementto furtherenhanceitsinternalprocesstoreviewitseffectivenessofthe2018audit. TheCommitteehasresponsibilityformonitoringauditorindependenceandobjectivityand issupportedindoingsobytheGroup’sAuditorIndependencePolicy(thePolicy).ThePolicy isupdatedannuallyandapprovedbytheCommittee.Itsetsoutthecircumstancesinwhich theexternalauditormaybepermittedtoundertakenon-auditservicesandisbasedonfour keyprincipleswhichspecifythattheauditorshouldnot: — Audititsownfirm’swork; — ActasmanagementoremployeesfortheGroup; — HaveamutualorconflictinginterestwiththeGroup;or — BeputinapositionofbeinganadvocatefortheGroup. ThePolicyhastwopermissibleservicetypes:thosethatrequirespecificapprovalbytheCommittee onanengagementbasisandthosethatarepre-approvedbytheCommitteewithanannual monetarylimitcappedatnomorethan5percentoftheGroupauditfeeintheproposedyearand cappedat£50,000individually.InaccordancewiththePolicy,theCommitteeapprovedthese permissibleservices,classifiedaseitherauditornon-auditservices,andmonitoredtheusageofthe annuallimitsonaquarterlybasis.Allnon-auditservicesundertakenbyKPMGwereagreedpriorto thecommencementofworkandwereconfirmedaspermissiblefortheexternalauditortoundertake inaccordancewiththePolicywhichcomplieswiththerulesandregulationsoftheUKFinancial ReportingCouncilsEthicalStandard(2016),theUSSecuritiesandExchangeCommission(SEC) andthestandardsofthePublicCompanyAccountingOversightBoard(PCAOB). Inkeepingwithprofessionalethicalstandards,KPMGalsoconfirmedtheirindependencetothe Committeeandsetoutthesupportingevidencefortheirconclusioninareportthatwasconsidered bytheCommitteepriortopublicationofthefinancialresults. Whileasyettobeformalisedasrules,theKingmanreview,theCompetitionsandMarketAuthority reviewoftheauditmarketandtheBrydonreviewwillshapethefutureofauditandtheaudit regulatorwithaviewtoenhancingauditqualityandindependence.TheCommitteewillcontinue tomonitordevelopmentstoensuretheGroup’spoliciesandprocessesaroundauditeffectiveness andindependenceevolveinlinewithmarketpractice. www.prudential.co.uk AnnualReport2018 Prudential plc 119 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationCommittee reports continued Key matters considered during the year continued Matter considered How the Committee addressed the matter Feespaidtotheauditor Reappointment Audittender ThefeespaidtoKPMGfortheyearended31December2018amountedto£18.3million (2017:£17.3million)ofwhich£2.3million(2017:£2.6million)waspayableinrespectofnon-audit services.Non-auditservicesaccountedfor13percentoftotalfeespayable(2017:15percent). AbreakdownofthefeespaidtoKPMGcanbefoundinnoteB2.4tothefinancialstatements. Ofthe£2.3millionofnon-auditservices,£1.1millionwasinrespectofassuranceservices.These servicescoveredassuranceovertheGroup’sSolvencyIIexternaldisclosures,assurancereportson internalcontrolsofcertainGroupcompaniesthataremadeavailableforthirdpartiesandcomfort letterprocedurestosupportdebtraisingintheyear.Theremaining£1.2millionprincipallyrelatedto workperformedaspartofplanningfortheproposeddemerger.Inallthesecases,theauditfirmwas consideredthemostappropriatetocarryoutthework,givenitsknowledgeoftheGroupandthe synergiesthatarisefromrunningtheseengagementsalongsideitsmainaudit. Allnon-auditserviceswerepre-approvedbytheCommitteeandwereinlinewiththePolicy discussedabove. Basedontheoutcomeoftheeffectivenessevaluationandallotherconsiderations,theCommittee concludedthattherewasnothingintheperformanceoftheauditorwhichwouldrequireachange. TheCommitteethereforerecommendedthatKPMGbereappointedastheauditor.Aresolution tothiseffectwillbeproposedtoshareholdersatthe2019AnnualGeneralMeeting. TheCommitteeacknowledgestheprovisionscontainedintheUKCodeinrespectofaudit tendering,alongwithEuropeanrulesonmandatoryauditrotationandaudittendering.In conformancewiththeserequirements,theCompanywillberequiredtochangeauditfirmno laterthanforthe2023financialyearend. Theexternalauditwaslastputouttocompetitiveretenderin1999whenthepresentauditor, KPMG,wasappointed.Since2005,theCommitteehasannuallyconsideredtheneedtoretender theexternalauditservice.TheCommittee’sChairmanandtheGroup’sFinanceDirectorcurrently recusethemselvesfromthesediscussions. TheGroupisundergoingaperiodofunprecedentedchangewithboththedemergerof M&GPrudentialfromPrudentialplcbeingconsideredandthenewinsuranceaccountingstandard (IFRS17)requiringimplementationin2022.TheCommitteecurrentlybelievesanychangeofauditor shouldbescheduledtolimitoperationaldisruptionduringsuchaperiodofchangegiventhe significantvolumeofworktobedeliveredbytheGroup’sfinanceteamsinrelationtothedemerger andpreparingtoimplementthenewinsuranceaccountingstandardin2022.TheCommittee considereditsstrategyonaudittenderinginFebruary2019,concludingthatwiththechangein implementationdateforIFRS17thatthepreviouslyproposedtimelineforappointinganewauditor shouldalsobeextendedbyoneyeartothe2023yearend.Inconductingthisreview,theCommittee concludedthatitwouldbeappropriatetocommenceacompetitivetenderforthe2023auditinthe firsthalfof2020.ThiswouldpermitthecurrentauditorstocompletethefirstyearofIFRS17 adoptionandreducethe‘self-review’threattoanyoftheauditfirmsconductingadvisoryserviceson implementationoffinancesystemsforthenewaccountingstandardwhoareinvitedtotenderforthe audit.ThesuggestedtimelineshouldalsoenabletheCommitteetotakeintoaccountanyproposals arisingfromthecurrentreviewsoftheauditingprofession.Thetimingremainssubjecttothe Committee’snormalannualreviewofauditorperformanceandrecommendationtoshareholders. TheCompanyhascompliedthroughoutthe2018financialyearwiththeprovisionsoftheStatutory AuditServicesforLargeCompaniesMarketInvestigation(MandatoryUseofCompetitiveTender ProcessesandAuditCommitteeResponsibilities)Order2014issuedbytheCompetitionand MarketsAuthority. Aplantoidentifysuccessorfirmstoensurethatthereissufficienttimeforanorderlytransitionand tosafeguardindependencewasconsideredandagreedbytheCommittee. InlinewiththeFRCEthicalStandard,therulesandregulationsoftheSECandthestandardsofthe PCAOB,anewleadauditpartner,PhilipSmart,wasappointedinrespectofthe2017financialyear. MrSmartisexpectedtobeinplaceforafive-yeartermuntilthecompletionofthe2021reporting cycle.Anewleadauditpartnerwouldberequiredforthe2022auditandanappropriatetransition plandeveloped. 120 Prudential plc AnnualReport2018 www.prudential.co.uk Key matters considered during the year continued Matter considered How the Committee addressed the matter Second line oversight Compliance, financial crime prevention, whistleblowing Regularreportingfrom theCompliancefunction RegularupdateswereprovidedtotheCommitteebytheGroupRegulatoryandGovernmentAffairs DirectorandtheGroupComplianceDirector.ThereportskepttheCommitteeapprisedofkey complianceactivities,issuesandcontrols,includingprogressagainstthe2018CompliancePlan, theoutcomeofcompliancemonitoringactivitiesacrosstheGroupandtheeffectivenessofbusiness units’complianceactivities. CompliancePlanandfocus for2019 Financialcrimeprevention Whistleblowing Keyactivitiesidentifiedforthefirsthalfof2019include:regulatoryengagement,includingmanaging thetransitionofourleadregulatorfromtheUK’sPrudentialRegulatoryAuthoritytotheHongKong IA,supportingdeliveryofthedemergeractivitiesinkeyareasandprovidingongoingadvice, guidanceandoversighttobusinessunitscoveringkeyriskssuchasconflictsofinterestandfinancial crime.TheCommitteeintendstoreviewupdatestothe2019GroupCompliancePlanaroundthe mid-yearpoint. GroupCompliancewillalsocontinuetodriveforwardcapabilitieswithintheteamandwider compliancecommunity,carryingoutactivitiestomaintainoversightofthetoprisksidentified. TheCommitteereceivedtheMoneyLaunderingReportingOfficer’sreportwhichassessedthe operationandeffectivenessoftheGroup’ssystemsandcontrolsinrelationtomanagingfinancial crimerisks. Aspartofitsresponsibilityfortheoversightoffinancialcrimeprevention,theCommitteereceived updatesoncybersecurity(aspartofajointmeetingheldwiththeRiskCommitteeinOctober2018), anti-briberyandcorruption,anti-moneylaunderingandsanctionsactivitiesundertakenduring theyear. TheGroupcontinuestooperateaGroup-widewhistleblowingprogramme(‘SpeakOut’),hosted byanindependentthirdparty(Navex).TheSpeakOutprogrammereceivesadhocreportsfrom awidevarietyofchannels,includingawebportal,hotline,emailandletters.Reportsarecaptured, confidentiallyrecordedbyNavex,andflaggedforinvestigationbytheappropriateteam.Underthe SeniorManagersCertificationRegime(SMCR),theroleoftheWhistleblowingChampioncontinues tobecarriedoutbytheChairofthePrudentialAssuranceCompany(PAC)AuditCommittee, anindependentnon-executivedirectorofPAC. TheCommitteeisresponsibleforoversightoftheeffectivenessoftheGroup’swhistleblowing arrangements.TheCommitteereceivesregularreportsonthemostseriouscasesandother significantmattersraisedthroughtheprogrammeandtheactiontakentoaddressthem.The CommitteeisalsobriefedonemergingSpeakOuttrendsandthemes.TheCommitteemay,and has,requestedfurtherreviewofparticularareasofinterest. TheCommitteereviewedtheGroup’sSpeakOutprogrammearrangementsduringtheyear, satisfyingitselfthattheycontinuetocomplywithregulatoryandgovernancerequirements.The Committeealsonotedtheconsistencyofapproachadoptedacrosssubsidiarycommittees.This wasfacilitatedthroughgreatervisibilityofregionalsignificantissues(addressedbysubsidiaryaudit committees)andtheiroutcomes.TheSpeakOutprocesshasbeenfurtherenhancedthisyearby focusingon(post-reporting)managementactionand,whererelevant,sharingoflessonslearnt. TheChairandCommitteespenttimeprivatelywiththeGroupResilienceDirector,toensurethat investigationswereadequatelyresourcedandappropriatelymanaged,thattherehadbeenno retaliationagainstanyonemakingareportandthatinvestigationswerenotimproperlyinfluenced. TheCommitteewasalsoupdatedonarrangementsforpromotingGroup-wideawarenessofthe SpeakOutpolicy(includingcomputer-basedtrainingtailoredforeachbusinessunit)andarefresh ofSpeakOutcommunicationsacrosstheGroup. www.prudential.co.uk AnnualReport2018 Prudential plc 121 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationCommittee reports continued Key matters considered during the year continued Matter considered How the Committee addressed the matter Third line oversight Internal audit Regularreporting   TheCommitteereceivedregularupdatesfromGroup-wideInternalAudit(GwIA)onaudits conductedandmanagement’sprogressinaddressingauditfindingswithinagreedtimelines. AnydelaysinimplementingremediationactionswereescalatedtotheCommitteeandgiven particularscrutiny. TheindependentassuranceprovidedbyGwIAformedakeypartoftheCommittee’sdeliberations ontheGroup’soverallcontrolenvironment.During2018,theareasreviewedincluded:change managementandtransformation,financialcontrols,outsourcingandthird-partysupply,customer outcomes,cyberrisk,complianceandregulatoryandsecondlineofdefence. TheDirectorofGwIAreportsfunctionallytotheCommitteeChairandformanagementpurposes totheGroupChiefExecutive,andalsohasdirectaccesstotheChairmanoftheBoard.Inaddition toformalCommitteemeetings,theCommitteemeetswiththeDirectorofGwIAinprivatetodiscuss mattersrelatingto,forexample,theeffectivenessoftheinternalauditfunction,significantaudit findingsandtheriskandcontrolcultureoftheorganisation. TheCommitteeChairalsomeetswithGwIA’sQualityAssuranceDirectortodiscusstheoutcome ofthequalityreviewsofGwIA’sworkandactionsarising. Annualplanandfocusfor2019 TheCommitteeapprovedthehalf-yearupdateofthe2018plan.Italsoconsideredandapproved theInternalAuditPlan,resourceandbudgetfor2019. Effectiveness The2019InternalAuditPlanwasformulatedbasedonabottom-upriskassessmentofauditneeds mappedagainstvariousmetricscombinedwithtop-downchallenge.Theplanwasthenmapped againstaseriesofriskandcontrolparameters,includingthetoprisksidentifiedbytheRisk Committee,toverifythatitisappropriatelybalancedbetweenfinancial,businesschange,regulatory andoperationalriskdriversandprovidesappropriatecoverageofkeyriskareasandauditthemes withinarisk-basedcycleofcoverage.Keyareasoffocusfor2019include:strategicchangeinitiatives, customeroutcomes,cybersecurity,financialriskandfinancialcontrols,outsourcinganddigitisation. TheCommitteeisresponsibleforapprovaloftheGwIAcharter,auditplan,resources,andfor monitoringtheeffectivenessofthefunction.TheCommitteeassessestheeffectivenessofGwIA throughacombinationofExternalQualityAssessment(EQA)reviews,requiredeveryfiveyears, andanannualinternaleffectivenessreview,performedbytheGwIAQualityAssuranceDirector. A2018InternalEffectivenessreview,performedbytheGwIAQualityAssuranceDirector,was conductedinaccordancewiththeprofessionalpracticestandardsoftheCharteredInstituteof InternalAuditors(CIIA)andassessedcontinuedconformancewiththeCIIAguidanceforEffective InternalAuditintheFinancialServices(theCode).ThereviewconcludedthatGwIAcontinuedto complywiththerequirementsofinternalauditpolicies,proceduresandpractices,andstandards inallmaterialrespectsrelatingtoauditplanningandexecution,andcontinuedtobealignedwith itsmandatedobjectivesandmaintainedgeneralconformancewiththeCIIACode. During2018,GwIAalsoprogressedthoseareasthatwereidentifiedbythe2017EQAas opportunitiesforenhancementtoexistingpractice.Inresponsetothedemergerannouncement,the functioncommenceditspreparationsforcreatingtwoappropriatelyskilledandsized,independent internalauditfunctions,wherepreviouslytherewasasinglefunction. HavingconsideredthefindingsoftheinternaleffectivenessreviewperformedbytheQuality AssuranceDirector,theCommitteeconcludedthatGwIAhadcontinuedtooperateincompliance withtherequirementsofGwIApolicies,proceduresandpracticestandardsinallmaterialrespects andremainedalignedtomandatedobjectivesduring2018. 122 Prudential plc AnnualReport2018 www.prudential.co.uk Key matters considered during the year continued Matter considered How the Committee addressed the matter Internal control Internalcontrolandrisk managementsystems  TheCommitteeisresponsibleforreportingandmakingrecommendationstotheBoardonthe effectivenessofGroup-wideinternalcontrolandriskmanagementsystems. Governance Groupgovernanceframework TheCommitteeconsideredtheoutcomeoftheannualreviewofthesystemsofinternalcontrol andriskmanagementasdiscussedonpages107and108.Thereviewidentifiedanumberofareas forimprovement,particularlyinrespectofthegeneralITcontrolenvironment,andthenecessary actionsthathavebeenorarebeingtaken.TheAuditCommitteesatgroupandsubsidiarylevel collectivelymonitoroutstandingactionsregularlyandensuresufficientresourceandfocusisin placetoresolvethemwithinareasonabletimeframe. TheBoardconfirmedthatthereisanongoingprocessforidentifying,evaluatingandmanagingthe significantrisksfacedbytheGroup,whichhasbeeninplacethroughouttheperiodanduptothe dateofthisreportandconfirmsthatthesystemremainseffective. Anupdatetotheorganisationalstructureandgovernancemodelforcybersecuritymanagement, tofurtherstrengthentheGroup’sinformationsecuritycapabilities,waspresentedatajointmeeting oftheRiskandAuditCommitteesinOctober2018.  TheGroupGovernanceManualsetsoutthepoliciesandproceduresbywhichtheGroupoperates withinitsframeworkofinternalgovernance,takingintoaccountrelevantstatutoryandregulatory matters.ItisaplatformformandatingspecificwaysofworkingacrosstheGroupandeachbusiness unitattestsannuallytocompliancewith: — MandatoryrequirementssetoutinGroup-widepolicies,includingmatterswhichmust bereportedtotheGroupfunctions;and — Mattersrequiringpriorapprovalfromthosepartieswithdelegatedauthority. TheCommitteereviewedtheresultsoftheGroupGovernanceManualannualcontentreviewand theresultsoftheyearendcertificationofcompliancewithGroupGovernanceManualrequirements fortheyearended31December2018. www.prudential.co.uk AnnualReport2018 Prudential plc 123 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationCommittee reports continued Howard Davies Chair of the Risk Committee Committee members  — Howard Davies (Chair)  — David Law   — Kai Nargolwala  — Alice Schroeder (from March 2018)  — Lord Turner  — Tom Watjen (from November 2018) Regular attendees  — Chairman of the Board  — Group Chief Executive  — Group Chief Risk Officer  — Chief Financial Officer  — Group Regulatory and Government  Relations Director  — Group General Counsel and  Company Secretary  — Director of Group-wide  Internal Audit Dependent on the business to be  discussed at each meeting, chief risk  officers of the business units and  members of the Group Risk Leadership  Team are invited to attend each meeting  as appropriate Number of meetings in 2018: Five. (In addition a joint meeting was  held with the Audit Committee)  Risk Committee report Dear Shareholder As Chair of the Risk Committee, I am  pleased to report on the Committee’s  activities and focus during 2018.  Committee operation The Committee assists the Board in  providing leadership, direction and  oversight of the Group’s overall risk  appetite and limits, risk strategy, and risk  culture. It also oversees and advises the  Board on current and future risk exposures  of the Group, including those which have  the potential to impact on the delivery of  the Group’s Business Plan. The Committee  reviews the Group Risk Framework and  recommends changes to it for approval by  the Board to ensure that it remains effective  in identifying and managing the risks faced  by the Group. In March 2018, the Group  announced the appointment of Mr Turner  as Group Chief Risk Officer (CRO) and  Executive Director. During the year, the  Committee welcomed Ms Schroeder and  Mr Watjen as members in March and  November respectively.  The Committee received regular reports  from the CRO, who is advised by the  Group Executive Risk Committee (GERC).  I provided feedback on the performance  of the CRO to the Group Chief Executive  Officer as part of the annual evaluation of  the Board and its members. The Committee  also received regular reports from the  Group-wide Internal Audit and Compliance  functions and updates from other areas of  the business as needed.  Transformation activity and demerger of M&GPrudential During 2018, a key area of consideration  for the Committee was the risk associated  with the Group’s portfolio of key strategic  change initiatives, including the merger  and transformation programmes at  M&GPrudential and the planned demerger  of M&GPrudential from the rest of the  Group. In March 2018, prior to the  announcement of the demerger, the  Committee considered the associated risks  of proceeding and weighed them against the  risks of retaining the current Group structure.  Analyses of the key financial risks to the  execution of the demerger under various  stress scenarios were considered. During the  year, the Committee considered updates,  risk opinions, guidance and assurance on  critical change and demerger activity.  Risk appetite and principal risks During 2018 we reviewed the Group’s  risk policies and the aggregate limits  accompanying the Group risk appetite  statements, updating limits where necessary  to reflect changes in the Group’s risk profile  and the evolving regulatory and  macroeconomic environments. We also  reviewed the principal risks facing the Group  and received regular updates on these  through the course of the year and  received regular reports from the chief risk  officers of our Material Subsidiaries. A  fuller explanation of principal risks facing  the Group and the way in which the Group  manages these is set out in the CRO’s report  on pages 52 to 69. During 2018, the  Committee considered risk assessments  and opinions on key areas covering the  risks associated with the Group’s Business  Plan and executive remuneration, further  details of which are noted below. In respect of our principal risks,  we continued to focus on those arising  from the products we offer our customers,  those inherent in our investment portfolios  and the risks that arise from the operation  of our businesses. We regularly reviewed  the strength of our capital and liquidity  positions, which included the results of  stress and scenario analyses, and the  significant ongoing changes to the  regulatory framework and environment.  In addition, we closely monitored risks  arising from the macroeconomic  environment and the pace of regulatory  developments across the globe.  In-depth reviews included consideration  of the Jackson fixed annuity business and  hedging programme. Reviews were also  performed on the Group’s credit risk  exposures, in the context of our assessment  of the global credit cycle, and into our Asia  business which included reviews of the  product lifecycle in Singapore, persistency  risk in Indonesia and fund management  and modelling in our Hong Kong and  Singapore businesses. During the year  we continued to oversee the work required  as a result of the continued applicability to  the Group of the requirements under the  Global Systemically Important Insurer  (G-SII) regime, which included the  approval of the 2018 Systemic Risk  Management Plan, Liquidity Risk  Management Plan and Recovery Plan.  Information security and privacy Information security and data privacy also  received attention from the Committee  in 2018. During the year we reviewed  progress achieved on the implementation of  our plans on cyber defence. The Committee  received updates on implementation  activity to ensure compliance with the EU’s  General Data Protection Regulation  124  Prudential plc  Annual Report 2018  www.prudential.co.uk (GDPR),whichcameintoforceinMay 2018.InOctober2018ajointsessionwith theAuditCommitteeoncybersecurity includedanupdateontheGroup-wide cybersecuritystrategyandinformation securityprogrammeandwasaimedat enhancingtheknowledgeofNon- executiveDirectorsaswellasproviding anupdateontheprogressoftheGroup’s approachtocybersecurity. Regulatory matters TheCommitteereviewedthemethodology andannualcalibrationoftheSolvencyII internalmodel,andwealsooversawthe submissionoftheGroup’sMajorModel ChangeapplicationinDecember2018 inrespectofthemodel.TheCommittee consideredtheGroupresultsoffield testingoftheInsuranceCapitalStandards (ICS)inOctober2018. Whereresponsibilitiesareperceivedto overlapbetweenthetwoCommittees, MrLawandIagreethemostappropriate Committeetoconsiderthematter. FollowingtheannouncementinAugust 2018thattheHongKongIAwouldbecome theGroup’sregulatorafterthedemerger ofM&GPrudential,updatesonthe discussionswiththeHongKongIAon thefutureregulatoryrelationshipwere providedaspartoftheCRO’sregular reportingtotheCommittee. Committee governance WeworkcloselywiththeAuditCommittee toensurebothCommitteesareupdated andalignedonmattersofcommoninterest. AsChairoftheCommittee,Ihave responsibilityforensuringtheCommittee operateseffectively.Inordertoenable theCommitteetoprovideconstructive challengetomanagement,Iencourage opendebateandcontributionsfromall Committeemembers.IreporttotheBoard infullaftereachmeetingonthemain mattersdiscussed.Anannualreviewofour effectivenesswascarriedoutaspartofthe Boardevaluation,describedinmoredetail onpage100.TheCommitteewasfoundto befunctioningeffectively. How the Committee spent its time during 2018 Markets and Group risk updates Groupriskupdate MaterialSubsidiaries Risk management Grouptopriskidentification Topriskdiscussions Businessunitspecificriskmatters RiskassessmentofBusinessPlan Riskfunctioneffectiveness Riskculture Riskoversightofremuneration Transformation Informationsecurityandprivacy Regulatory matters Regulatorymatters Risk framework SolvencyIIinternalmodeldevelopmentandchanges Groupriskappetitereview Risklimitupdates Riskpolicyframeworkrefresh Risk-relatedcompliancepolicies Group-wideInternalAuditupdate Governance and reporting Fullandhalfyearriskdisclosures GlobalSystemicallyImportantInsurer LiquidityRiskManagementPlan,SystemicRiskManagementPlanandRecoveryPlan SolvencyIIreportingandgovernanceprocesses OwnRiskandSolvencyAssessment Year-endE-capresults GroupRegulatoryandCompliancereport Committeetermsofreference Feb May Jul Oct Dec l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l www.prudential.co.uk AnnualReport2018 Prudential plc 125 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationCommittee reports continued Key matters considered during the year Matter considered How the Committee addressed the matter Business Plan AspartofitsroleinoverseeingandadvisingtheBoardonfutureriskexposuresandstrategicrisks, theCommitteereviewedGroupRisk’sassessmentoftheGroup’sBusinessPlanwhichcovereda rangeofbothfinancialandnon-financialconsiderationsincludingthoseassociatedwiththe demergerofM&GPrudentialfromtheGroup. AspartoftheGroupRisk’sreviewoftheannualGroupBusinessPlan,GroupApprovedLimitswere reviewed,updatedandapprovedbytheCommittee. Risk appetite TheCommitteeisresponsibleforrecommendingtheGroup’soverallriskappetiteandtolerance totheBoard. Risk framework and management Transformation activity and demerger of M&GPrudential TheCommitteeapprovedtheGroupRiskAppetiteStatement,whichsetsaggregaterisklimitsin respectofcapitalrequirements,earningsvolatilityandliquidityaswellasmaintainingtheexisting tolerancelevelsassociatedwitheachoftheselimits. Annually,businessunitsmustassessandcertifytheircompliancewiththeGroupRiskFramework andriskpoliciesaspartoftheannualGroupGovernanceManualcertification.Thecertification processforriskpoliciesisfacilitatedbyGroupRiskandsubjecttooversightbytheCommittee. In2018,theGroupRiskFrameworkandriskpoliciesweresubjecttotheirannualreview,with changesbeingapprovedbytheCommittee. TheCommitteeconducteditsannualreviewofRiskeffectivenessinFebruary.Italsoapprovedthe GroupRiskMandate,whichformallysetsoutthepurposeandresponsibilitiesoftheGroupRisk function,andhowitworkswithotherfunctionsandmaintainsoversightofbusinessunitrisk functionsandtheireffectivenessinmanagingthekeyriskstotheGroup. InDecember2018,theCommitteeconsideredanupdateonactivitiessupportingapositiverisk cultureacrossPrudential,includingthedevelopmentsandimprovementsimplementedacrossthe businessunitsovertheyear. TheCommitteeconsideredtheresultsofanumberof‘deepdive’reviewsundertakenduring2018. ThesefocusedonrisksembeddedwithintheexistingportfolioofproductsinourUS,AsiaandUK businesses,aswellastherisksarisingfrom,andto,thedemerger. InMarch2018,theGroupannouncedtheplanneddemergerofM&GPrudentialfromtherestof theGroup,furthercontributingtotheportfolioofkeystrategicchangeactivityacrosstheGroup. TheCommitteewasprovidedwithupdatesonthisactivitythroughouttheyear,andconsidered theresultsofriskopinions,guidanceandassuranceonthedemerger. Analysesofthekeyfinancialriskstotheexecutionofthedemergerundervariousstressscenarios wereconsidered. RiskrecommendationsandobservationswereprovidedtotheCommitteeonthekeymerger andtransformationprogrammescurrentlyongoingatM&GPrudential. Hong Kong Insurance Authority (IA) InAugust2018,itwasannouncedthattheHongKongIAwouldbecometheGroup-widesupervisor forPrudentialplcafterthedemergerofM&GPrudential.Keyupdatesonthediscussionswiththe HongKongIAonthefutureregulatoryrelationshipwereprovidedtotheCommitteeaspartofthe CRO’sregularreporting. Information security and privacy InJuly2018,theCommitteewasprovidedwithanupdateonthekeydeliverablesrelatingtothe Group’scyberresilienceandthroughout2018theCommitteereceivedregularupdatesonGroup- wideinformationsecuritymetricsprovidingaviewofsecuritypostureacrossourbusinesses. Anupdatetotheorganisationalstructureandgovernancemodelforcybersecuritymanagement, tofurtherstrengthentheGroup’sinformationsecuritycapability,waspresentedatajointmeeting oftheRiskandAuditCommitteesinOctober. InNovember2018,PrudentialparticipatedintheannualFTSE350CyberGovernanceHealthCheck survey,insightsfromwhichinformgovernmentpolicyoncybersecurityandcontributetoguidance andsupportprovidedtoindustryandboards. Inthekeyareaofdataprivacy,theCommitteereceivedupdatesthroughouttheyearonprogress onGroup-wideimplementationactivitytoensurecompliancewiththeGeneralDataProtection Regulation. 126 Prudential plc AnnualReport2018 www.prudential.co.uk Key matters considered during the year continued Matter considered How the Committee addressed the matter Jackson oversight TheCommitteereceivedregularupdatesontheJacksonbusinessthroughout2018,including updatesonfinancialriskoversightoverthebusiness. Group principal risks Solvency II reporting Global Systemically Important Insurer (G-SII) Stress testing TheCommitteeapprovedupdatestokeyrisklimitsusedinitsmonitoringofthefinancialriskstothe Jacksonbusiness,inparticularthoseoverinterestraterisk. Additionally,theCommitteeconsideredtheresultsofin-depthreviewsperformedontheJackson fixedannuitybusinessandhedgingprogramme. TheCommitteeevaluatedtheGroup’sprincipalrisks,consideringrecommendationsforpromoting additionalrisksandchangesinthescopeofexistingrisks.TheCommitteereceivedregularreporting ontheprincipalrisksandmitigatingactionsoverthecourseoftheyearwithintheGroupCRO’s regularreporttotheCommittee. ThesereportsalsoprovidedtheCommitteewithregulatoryupdates;developmentsunder SolvencyIIandtheGroup’sinternalmodel;theimplicationsofthedevelopingglobalcapital standardsincludingtheengagementwiththeHongKongIAonthedevelopmentofanindustry groupcapitalandriskmanagementframework;anddevelopmentsandthedeliverablesrequiredas aresultoftheGroup’sdesignationasaGlobalSystemicallyImportantInsurer. TheCommitteeconsideredtheOwnRiskandSolvencyAssessmentreportbasedontheoutcomes oftheGroup’sBusinessPlanandthefullyear2017riskandsolvencypositionspriortoitsapprovalby theBoard.ThereportwasalsoconsideredinlightoftheresultsoftheGroup’sregularstresstesting. TheCommitteereviewedthemethodologyandannualcalibrationoftheSolvencyIIinternalmodel. The2018MajorModelChangeapplicationwascloselyoverseenbytheCommitteethroughout theyearandweapprovedthemodelchangesaspartofthesubmissionoftheapplicationto theregulator. TheFinancialStabilityBoard(FSB)confirmedinNovember2017thatthe2016GlobalSystematically ImportantInsurerdesignationwouldcontinuetoapplytotheGroup.Asaresult,in2018the Committeewasrequiredtoconsiderandapproveupdateddeliverablesassociatedwiththe designation.TheseincludedtheSystemicRiskManagementPlan,RecoveryPlanandLiquidity RiskManagementPlan. StressandscenariotestingisakeyriskmeasurementandmanagementtoolfortheGroup.The ReverseStressTestexercisewascarriedoutwhichconfirmedtheGroup’spositionasremaining resilienttocertainbusinessfailurescenarios.ThereportrelatedtotheGroup’syearend2017 positionandwassubmittedtothePRA. TheCommitteealsoconsideredtheresultsofthe2018EuropeanInsuranceandOccupational PensionsAuthority(EIOPA)StressTests,whichweresubmittedtothePRAandEIOPA. Remuneration TheCommitteehasaformalroleintheprovisionofadvicetotheRemunerationCommitteeonrisk managementconsiderationsinrespectofexecutiveremuneration. TheCommitteeconsideredreviewsontheriskmanagementconsiderationsassociatedwithannual incentiveplansduringtheyearandreportsonremuneration-relatedmatters. Compliance and audit reporting TheCommitteereceivedregularreportingonkeycompliancerisksandmitigationactivity,and reviewedandapprovedupdatestoanumberofregulatorycompliancerisk-relatedpoliciesincluding thosearoundanti-briberyandcorruption,conflictsofinterestandpersonalaccountdealing. TheCommitteealsoreceivedupdatesfromGroup-wideInternalAuditthroughouttheyear. www.prudential.co.uk AnnualReport2018 Prudential plc 127 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationStatutory and regulatory disclosures Powers of the Board TheBoardmayexerciseallpowers conferredonitbytheCompany’sArticles andtheCompaniesAct2006.This includesthepowersoftheCompanyto borrowmoneyandtomortgageorcharge anyofitsassets(subjecttothelimitations setoutintheCompaniesAct2006and theCompany’sArticles)andtogivea guarantee,securityorindemnityin respectofadebtorotherobligationof theCompany. Securities dealing and inside information Prudentialhasadoptedsecuritiesdealing rulesrelatingtotransactionsbyDirectors ontermsnolessexactingthanrequiredby Appendix10totheHKListingRulesand byrelevantUKregulations.TheDirectors havecompliedwiththeserulesthroughout theperiod. TheGrouphasadoptedanInside InformationPolicywhichincludes guidanceandproceduresforthe identification,disseminationandescalation ofinsideinformationaswellasappropriate controlsonthedisclosureofsuch informationinlinewithregulatory requirements.Allstaffaremadeaware ofthepolicyandreceivecommunications remindingthemoftheirobligationswhen theyworkonanyconfidentialmattersin thebusinessorarenotifiedwhenthe Companyentersorexitsaclosedperiod. Requirements of Listing Rule 9.8.4 InformationtobeincludedintheAnnual ReportandaccountsunderListingRule 9.8.4maybefoundasfollows: Listing Rule Description 9.8.4(4) Detailsoflong-term Page 161 incentiveschemes requiredbyListing Rule9.4.3 9.8.4(10) ContractsofSignificance 106 involvingaDirector Financial reporting TheDirectorshaveadutytoreportto shareholdersontheperformanceand financialpositionoftheGroupandare responsibleforpreparingthefinancial statementsonpages172to329andthe supplementaryinformationonpages342 to375.Itistheresponsibilityoftheauditor toformindependentopinions,basedonits auditofthefinancialstatementsandits auditoftheEEVbasissupplementary information,andtoreportitsopinionsto theCompany’sshareholdersandtothe Company.Itsopinionsaregivenonpages 330to340andpage376. CompanylawrequirestheDirectorsto preparefinancialstatementsforeach financialyearthatgiveatrueandfairview ofthefinancialaffairsoftheCompanyand oftheGroup.Thecriteriaappliedinthe preparationofthefinancialstatements aresetoutinthestatementofDirectors’ responsibilitiesonpages329and375. CompanylawalsorequirestheBoardto approvetheStrategicreport.Inaddition, theUKCoderequirestheDirectors’ statementtostatethattheyconsiderthe AnnualReportandfinancialstatements, takenasawholeisfair,balancedand understandableandprovidesthe informationnecessaryforshareholders toassesstheCompany’spositionand performance,businessmodelandstrategy. TheDirectorsarefurtherrequiredto confirmthattheStrategicreportincludes afairreviewofthedevelopmentand performanceofthebusiness,witha descriptionoftheprincipalrisksand uncertainties.Suchconfirmationis includedinthestatementofDirectors’ responsibilitiesonpages329and375. TheStrategicreportprovides,onpages48 to50,adescriptionoftheGroup’scapital position,financingandliquidity.Therisks facingtheGroup’sbusinessarediscussed intheGroupChiefRiskOfficer’sreportof therisksfacingourbusinessandhowthese aremanagedonpages52to69. TheDirectorswhoheldofficeatthedate ofapprovalofthisDirectors’reportconfirm that,sofarastheyareeachaware,thereis norelevantauditinformationofwhichthe Company’sauditorisunaware;each Directorhastakenallthestepsthatheor sheoughttohavetakenasaDirectorto makehimselforherselfawareofany relevantauditinformationandtoestablish thattheCompany’sauditorisawareofthat information.Thisconfirmationisgivenand shouldbeinterpretedinaccordancewith theprovisionsofSection418ofthe CompaniesAct2006. Going concern Inaccordancewiththeguidanceissued bytheFinancialReportingCouncilin September2014,‘GuidanceonRisk Management,InternalControlandRelated FinancialandBusinessReporting’,after makingsufficientenquiriestheDirectors haveareasonableexpectationthatthe CompanyandtheGrouphaveadequate resourcestocontinuetheiroperationsfor aperiodofatleast12monthsfromthedate thatthefinancialstatementsareapproved. Insupportofthisexpectation,the Company’sbusinessactivities,together withthefactorslikelytoaffectitsfuture development,successfulperformanceand positioninthecurrenteconomicclimate, aresetoutintheStrategicreportonpages 10to86.TherisksfacingtheGroup’s capitalandliquiditypositionsandtheir sensitivitiesarereferredtointheStrategic reportonpages52to69andnoteII(c) ‘SolvencyCapitalPositionat31December 2018’withinAdditionalunauditedfinancial information.InadditiontheDirectors consideredtheoperationalandfinancial risksarisingfromtheUK’sintended departurefromtheEuropeanUnionina numberofpossiblescenarios,including thosewhichassumenowithdrawal agreementisenacted.TheGroup’sIFRS financialstatementsincludethedetailsof theGroup’sborrowingsinnoteC6onpage 269,themarketriskandliquidityanalysis associatedwiththeGroup’sassetsand liabilitiescanbefoundinnoteC3.4(a)on pages236to238,policyholderliability maturityprofilebybusinessunitsinnotes C4.1(b),(c)and(d)onpages244,246and 248respectively,cashflowdetailsinthe consolidatedstatementofcashflowsand provisionsandcontingenciesinnotesC11 andD2.TheDirectorsthereforeconsiderit appropriatetocontinuetoadoptthegoing concernbasisofaccountinginpreparing thefinancialstatementsfortheyearended 31December2018. 128 Prudential plc AnnualReport2018 www.prudential.co.uk Customers ThefivelargestcustomersoftheGroup constitutedinaggregatelessthan 30percentofitstotalrevenuefromsales foreachof2018and2017. US regulation and legislation AsaresultofitslistingontheNewYork StockExchange,theCompanyisrequired tocomplywiththerelevantprovisionsof theSarbanes-OxleyAct2002astheyapply toforeignprivateissuersandhasadopted procedurestoensuresuchcompliance. Inparticular,inrelationtoSection302 oftheSarbanes-OxleyAct2002which coversdisclosurecontrolsandprocedures, aDisclosureCommitteehasbeen established,reportingtotheGroupChief Executive,chairedbytheChiefFinancial OfficerandcomprisingmembersofGroup headofficemanagement.Theworkofthe DisclosureCommitteesupportstheGroup ChiefExecutiveandChiefFinancialOfficer inmakingthecertificationsregardingthe effectivenessoftheGroup’sdisclosure procedures. Change of control Undertheagreementsgoverning PrudentialCorporationHoldingsLimited’s lifeinsuranceandfundmanagementjoint ventureswithChinaInternationalTrust& InvestmentCorporation(CITIC),ifthereis achangeofcontroloftheCompany,CITIC mayterminatetheagreementsandeither (i)purchasetheCompany’sentireinterest inthejointventureorrequiretheCompany tosellitsinteresttoathirdpartydesignated byCITIC,or(ii)requiretheCompanyto purchaseallofCITIC’sinterestinthejoint venture.Thepriceofsuchpurchaseorsale istobethefairvalueofthesharestobe transferred,asdeterminedbytheauditor ofthejointventure. www.prudential.co.uk AnnualReport2018 Prudential plc 129 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationIndex to principal Directors’ report disclosures Information required to be disclosed in the Directors’ report may be found in the following sections: Information Section in Annual Report Page number(s) Disclosure of information to auditor Statutory and regulatory disclosures Directors in office during the year Board of Directors Corporate responsibility governance Corporate responsibility review Employment practices Corporate responsibility review Greenhouse gas emissions Corporate responsibility review Charitable donations Corporate responsibility review Political donations and expenditure Corporate responsibility review Remuneration Committee report Directors’ remuneration report Directors’ interests in shares Directors’ remuneration report Agreements for compensation for loss of office or employment on takeover Directors’ remuneration report Details of qualifying third-party indemnity provisions Governance report Internal control and risk management Governance report Powers of Directors Governance report Rules governing appointment of Directors Governance report Significant agreements impacted by a change of control Future developments of the business of the Company Governance report Group Chief Executive’s report 128 89 to 94 70 to 86 78 to 80 75 to 77 85 85 132 to 169 158 162 and 163 106 107 and 108 128 105 129 4 to 7 Post-balance sheet events Note D3 of the notes on the Group financial statements 299 Rules governing changes to the Articles of Association Structure of share capital, including changes during the year and restrictions on the transfer of securities, voting rights and significant shareholders Business review Changes in borrowings Dividend details Financial instruments Shareholder information 420 Shareholder information and note C10 of the notes   on the Group financial statements 420, 421 and 291 Strategic report Strategic report and note C6 of the notes on the  Group financial statements Strategic report 10 to 86 48, 49 and 269 2 and 39 Strategic report and Additional information 52 to 69 and 407 In addition, the risk factors set out on pages 407 to 415 and the additional unaudited financial information set out on pages 378 to 406, are  incorporated by reference into the Directors’ report. Signed on behalf of the Board of Directors Alan F Porter Group General Counsel and Company Secretary 12 March 2019 130  Prudential plc  Annual Report 2018  www.prudential.co.uk 04 Directors’ remuneration report Annual statement from the Chairman of the Remuneration Committee Our Executive Directors’ remuneration at a glance Summary of the current Directors’ remuneration policy Annual report on remuneration Supplementary information Page 132 135 137 142 166 ThisreporthasbeenpreparedtocomplywithSchedule8ofTheLargeandMedium-sizedCompaniesandGroups (AccountsandReports)(Amendment)Regulations2013,aswellastheCompaniesAct2006andotherrelatedregulations. Thefollowingsectionsweresubjecttoaudit:Tableof2018and2017ExecutiveDirectortotalremuneration (the‘singlefigure’)andrelatednotes,salaryinformationtableinsectionentitledRemunerationinrespectof performancein2018,Pensionentitlements,Long-termincentivesawardedin2018,ChairmanandNon-executive Directorremunerationin2018,StatementofDirectors’shareholdings,Outstandingshareoptions,Recruitment arrangementsandPaymentstopastDirectorsandpaymentsforlossofoffice. www.prudential.co.uk www.prudential.co.uk AnnualReport2018 Prudential plc 131 AnnualReport2018 Prudential plc 131 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationDear shareholder, I am pleased to present the Remuneration Committee’s report for the year to 31 December 2018. isdeliveredwithintheCompany’srisk frameworkandappetites,andthatthe conductexpectationsofPrudential,our regulatorsandotherstakeholdersaremet. TheCommittee’sreportispresentedinthe followingsections: 1 2 3 An‘ataglance’summaryoftheGroup’s remunerationarrangementsonpages 135and136; AsummaryofourDirectors’ remunerationpolicyonpages137 to141whichdescribeshowwepay Directors.Thispolicywasapproved byshareholdersatthe2017AGM; OurAnnualreportonremunerationon pages142to165whichdescribeshow theCommitteeappliedtheDirectors’ remunerationpolicyin2018andthe decisionsithasmadeinrespectof2019; and 4 Supplementaryinformationonpages 166to169. Bywayofpreface,Iwouldliketoshare thecontextforthekeydecisionsthe Committeetookduring2018,inparticular, howwerewardedperformanceachieved duringtheyear,theremuneration arrangementsforthosejoiningand steppingdownfromtheBoardandthe decisionsrelatingtoremuneration arrangementsin2019. IamdelightedtowelcomeFieldsWicker- MiurinwhojoinedtheCommitteein September2018. Implementing the Directors’ remuneration policy During2018,theCommitteeoperated allelementsofremunerationinlinewith theDirectors’remunerationpolicy,which receivedthesupportof90.7percent ofshareholdersattheAGMinMay 2017.Thenewpolicysimplifiedpay arrangementsbyreducingthenumberof annualbonusmeasures,italsointroduced atwo-yearholdingperiodonlong-term incentiveawardsandincreasedshare ownershipguidelines. Iampleasedtonotethatanannualreview oftheCommittee’seffectivenesswas carriedoutin2018aspartoftheBoard evaluation,asdescribedinmoredetail onpage100.TheCommitteewasfound tobefunctioningeffectively. Rewarding 2018 performance Prudential’sexecutiveremuneration arrangementsrewardtheachievementof Group,business,functionalandpersonal targets,providedthatthisperformance AssetoutintheStrategicreportsection earlierinthisAnnualReport,theGroup deliveredastrongfinancialresultwhich hasbeenachievedinparalleltotheGroup’s goodprogressinthepreparationsforthe intendeddemergerofM&GPrudential. Thetableoppositeillustratesachievement ofKPIs. 2018operatingprofitandGroupfree surplusgenerationexceededthestretching targetsestablishedbytheBoard,with operatingprofit6percenthigherand Groupfreesurplusgeneration14percent higherthan2017onaconstantexchange ratebasis,despitelowerearningsfrom annuitiesfollowingthereinsurance transactioninMarch2018.EEVnew businessprofitwas11percenthigherthan prioryearonaconstantexchangerate basisreflectingtheperformancesoutlined inthebusinessperformancereview,which deliveredaresultapproachingtheBoard approvedtargets.Allofourbusinessunits achievedtargetremittanceslevelsand, althoughlowerthanthepriorperiod,we achievedourobjectivetobalancenet remittancessufficienttocoverthedividend andcorporatecosts,withreinvestmentin profitableopportunitieswithinthe businessunits,andmaintainedsignificant cashstockatthecentre.Thebusinessunit remittancescontributedtoGroup cashflow,whichapproachedthestretch targetlevel.TheGroupachievedthese resultswhilemaintainingappropriatelevels ofcapitalandwhileoperatingwithinthe Group’sriskframeworkandappetites.The Committeebelievesthatthebonusesit awardedtoExecutiveDirectorsfor2018 (between84percentand95percentof executives’maximumAIPopportunities) appropriatelyreflectthisperformance. Performancein2018hascontinuedto deliveronthemomentumachievedin recentyears.TheGroupdeliveredtotal operatingprofitsof£13,782millioninthe 2016,2017and2018financialyears. Basedontotalshareholderreturn(TSR) andthisstrongcumulativeoperating profitperformanceovertheperiod,the Committeedeterminedthatbetween 55.5and62.5percentofthePrudential LongTermIncentivePlan(PLTIP)awards madetoExecutiveDirectorsin2016 wouldvest(dependingonthebusiness unit).Theseawardswillbereleasedto participantsinApril2019. TheCommitteecontinuestoensure thatpaymentsandshareorADRaward releasesreflecttheperformanceofthe business,andremainsmindfulofitsscope tousediscretionifitisnotsatisfiedthat underlyingfinancialperformancejustifies therewardsarithmeticallysuggestedby theachievementoftheperformance conditions. Thetotal2018remunerationor‘single figure’fortheGroupChiefExecutive,Mike Wells,is13.2percentlowerthanhistotal 2017‘singlefigure’,notwithstandinghis exceptionalleadershipandpersonal performance.Thischieflyreflectsthata lowerproportionof2016PLTIPawards vestedthanof2015awards. Changes to the executive team Asyouwillbeaware,therehavebeen changestoPrudential’steamofExecutive Directorsduring2018.JamesTurnerwas appointedasGroupChiefRiskOfficerin March2018.AnneRichardssteppeddown fromtheBoardasChiefExecutive,M&Gin August2018.BarryStoweretiredas ChairmanandChiefExecutiveOfficerof ourNorthAmericanBusinessUnit(NABU) andsteppeddownfromtheBoardon 31December2018.Hewassucceededby MichaelFalconwhowasappointedtothe Boardon7January2019.Theremuneration decisionsarisingfromthesechangeswere disclosedinstockexchangeandwebsite announcementswhentheytookplace. Furtherinformationcanbefoundinthe RecruitmentarrangementsandPayments topastDirectorssectionsofthisreport. Implementation in 2019 TheCommitteeintendstocontinueto operatewithinthecurrentDirectors’ remunerationpolicyduring2019.In determiningremunerationpackagesfor 2019,theCommitteewasmindfulofthe needforrestraintinbasesalaryincreases. AllExecutiveDirectorsreceivedasalary increaseof2percenteffective1January 2019.The2019salaryincreasebudgetsfor otheremployeesacrosstheGroup’s businessunitswerebetween2percentand 8percent.Nochangeshavebeenmadeto executives’maximumopportunitiesunder eithertheannualincentiveorthelong-term incentiveplans,aswebelieveremuneration packagesprovideanappropriatebalance betweenperformanceovertheshortand thelongterm. Duringlate2018andearly2019, Icorrespondedwithandmetthemajority ofourmajorshareholders,aswellas organisationsthatrepresentandadvise shareholders.OnbehalfoftheCommittee, 132 Prudential plc AnnualReport2018 www.prudential.co.uk Annual statement from the Chairman of the Remuneration CommitteeDirectors’ remuneration reportPerformance measures Group performance (£m)3 Operating profit1 Prudential’sprimarymeasure ofprofitabilityandakeydriver ofshareholdervalue. 4,699 4,827 3,969 4,256 3,154 3%/6% 2017-2018 growth (AER/CER)4 2018 bonus achievement Above stretch target level CAGR5(excludingKorea):+11% 2014 2015 2016 2017 2018 EEV new business profit2 Ameasureofthefutureprofitability ofthenewbusinesssoldduringtheyear andindicatestheprofitablegrowthof theGroup. CAGR5(excludingKoreaandUKbulk annuitynewbusinessprofits):+18% Group free surplus generation Ameasureoftheinternalcash generationofourbusinessunits. 3,616 3,877 3,088 7%/11% 2,492 2,021 2014 2015 2016 2017 2018 3,566 3,640 4,047 3,025 2,553 11%/14% CAGR5(excludingKoreaandUKbulk annuitynewbusinessprofits):+14% Business unit remittances3 CashflowsacrosstheGroupreflectour aimofachievingabalancebetween ensuringsufficientnetremittancesfrom businessunitstocoverthedividend (aftercorporatecosts)andtheuseof cashforreinvestmentinprofitable opportunities. 2014 2015 2016 2017 2018 1,625 1,482 1,718 1,788 1,732 -3% CAGR5:+4% 2014 2015 2016 2017 2018 Operatingprofit accountedfor35percent ofGroupfinancialbonus targets. Approaching target level EEVnewbusinessprofit accountedfor15percent ofGroupfinancialbonus targets. Above stretch target level Groupfreesurplus generationaccountedfor 30percentofGroup financialbonustargets. Above target, approaching stretch target level Acashflowmeasure wasusedtodetermine 20percentoftheGroup financialbonustargets. Notes 1 Inthisreport‘operatingprofit’referstoadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.Aspreviouslyreportedandexcludingthecontribution fromtheKorealifebusinessforallyears. 2 AspreviouslyreportedandexcludingthecontributionfromtheKorealifebusinessandUKbulkannuitynewbusinessprofitsforallyears. 3 Asreportedbasis. 4 Asreportedbasis/constantexchangebasis(excludingbusinessunitremittances,whicharepresentedasreported). 5 2014-2018CAGRasreported. www.prudential.co.uk AnnualReport2018 Prudential plc 133 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationDirectors’ remuneration report continued This approach benefits from maximising  the community of interest between  Executive Directors and other shareholders  during the 2019 to 2021 period, improving  simplicity by reducing the number of  measures used in the PLTIP, and providing  a set of metrics common to all Executive  Directors by removing the different  measures and weightings previously  applied to Group executives, business unit  Chief Executives and to the Group Chief  Risk Officer. Reduced pension benefits for newly recruited Executive Directors The Committee is mindful of the recent  developments with regards to the  alignment of retirement benefits across  the Group, and for externally recruited  Executive Directors appointed on or after  1 March 2019 has committed to reducing  the pension benefits from the current level  of 25 per cent of salary to 20 per cent of  salary. As part of next year’s review of the  Directors’ remuneration policy, the  Committee will consider its approach to  Executive Director pension benefits further  in the light of market developments, to  ensure they are appropriately aligned to  the retirement arrangements offered  across the wider workforce taking into  account the composition of the Group  at that time. Early publication of the CEO pay ratio The Committee has decided to publish  the CEO pay ratio in the 2018 Directors’  remuneration report, one year in advance  of the disclosure becoming a requirement  under the UK Companies (Miscellaneous  Reporting) Regulations 2018. This has  been welcomed by many shareholders. Enhanced disclosure of performance against personal and functional Annual Incentive Plan targets This report includes more detail about the  process for setting personal and strategic  targets, and about levels of achievement  against the targets used for 2018 bonuses.  There is also a new section on the  functional objectives used in the  determination of the Group Chief Risk  Officer’s bonus. These disclosures can  be found in the Annual report on  remuneration.  I would like to thank them for their  engagement. During this consultation,  there was a great deal of support for the  proposals which the Committee made for  2019 and valuable discussions on other  areas for consideration.  In light of conversations with shareholders  and their advisers, and given the unusual  circumstances of the Group as it prepares  for the planned demerger of the  M&GPrudential business, the Committee  has made the following changes for 2019  which aim to enhance the transparency of  executive remuneration arrangements;  simplify the connection between  performance and reward; and reflect  changes in market practice which are  developing in the context of the new UK  Corporate Governance Code: Reduced proportion of 2019 PLTIP awards vesting for threshold performance The Committee has reduced the  proportion of 2019 PLTIP awards which  would vest for threshold performance  from 25 per cent to 20 per cent. This would  see the value available for threshold  performance decrease from 100 per cent  of salary for the Group Chief Executive to  80 per cent of salary.  Revised 2019 PLTIP award performance measures It is imperative that the performance  measures attached to PLTIP awards create  a clear focus within the executive team  and a straightforward connection with  the value to be delivered to shareholders,  particularly as the Group prepares for the  planned demerger. On this basis, the  Committee has decided that a different  mixture of performance conditions are  used, specifically for the awards to be  made in 2019, which will vest based  on performance over the 2019 to 2021  financial years.  The vesting of 75 per cent of the 2019  PLTIP awards will be based on the  achievement of relative TSR targets.  Performance against our balanced  scorecard targets will continue to  determine the vesting of the remaining  25 per cent of the awards as set out in the  Statement of implementation in 2019. The  measures attached to long-term incentive  awards to be made in 2020 and subsequent  years will be developed in light of the  evolving priorities of the business and we  will consult with shareholders on these in  due course. Post cessation share ownership policy Our current policy is that existing  remuneration arrangements, including the  deferral under the bonus into Prudential plc  shares or ADRs for three years and a  post-performance holding period of two  years for awards of Prudential plc shares  or ADRs under the PLTIP, will normally  continue to provide alignment between the  interests of our senior executives and our  other shareholders for a period after the  end of employment. This will be reviewed  as part of the development of the new  Directors’ remuneration policy in 2019.  In conclusion The Committee intends to seek  shareholder approval for a new Directors’  remuneration policy at the 2020 AGM.  During 2019, we will review this policy,  taking into account the demerger, the  views of our shareholders, evolving market  practice in meeting the requirements of the  new UK Corporate Governance Code,  changing accounting standards and the  broader regulatory and competitive  environment. I trust that you will find  this report a clear account of the way in  which the Committee has implemented  the Directors’ remuneration policy  during 2018.  Anthony Nightingale, CMG SBS JP Chairman of the Remuneration Committee 12 March 2019 134  Prudential plc  Annual Report 2018  www.prudential.co.uk Our Executive Directors’ remuneration at a glance Our current remuneration architecture Salary and benefits Cash bonus Deferred bonus Prudential Long Term Incentive Plan (PLTIP) Key elements1 Fixed pay Short-term variable pay Financial/functional and personal objectives set with reference to business plans approved by the Board Long-term variable pay Stretching operating profit ranges set with reference to business plans approved by the Board for in-flight awards2 TSR vesting relative to international insurance peers Balanced scorecard of capital, conduct and diversity measures 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 2 2 0 2 3 2 0 2 Key features of the policy How we implemented the policy Broadly aligned with pay budget for other employees Salary increase of 2% in 2018 The maximum opportunity is up to 200% of salary 40% of bonus is deferred into shares for three years Award is subject to malus and clawback provisions The Group Chief Executive has a maximum bonus opportunity of 200% of salary. For other Executive Directors the maximum is 180% of salary or less 2018 bonuses were paid based on financial performance or functional measures as well as personal objectives Maximum award under the plan is 550% of salary Awards in 2018 were below the plan limits: — Group Chief Executive: Aligned with long-term business strategy and delivery of shareholder value Measured over three financial years from year of award with a two-year post-performance holding period Award is subject to malus and clawback provisions 400% of salary — CEO, NABU: 460% of salary — CEO, M&G: 450% of salary3 — Other PLTIP awards were 250% of salary For business unit CEOs, awards vest based on TSR, business unit operating profit and balanced scorecard measures For other Executive Directors, awards vest based on TSR, Group operating profit and balanced scorecard measures Share ownership guidelines Share ownership guidelines Significant share ownership guidelines for all Executive Directors as follows: — 400% of salary for the Group Chief Executive — 250% of salary for other Executive Directors Notes 1 TheCEO,NABUisalsoeligibletoreceivea10percentshareoftheJacksonbonuspool. 2 PLTIPawardsgrantedin2019willbesubjecttorelativeTSRandbalancedscorecardmeasuresonly. 3 TheCEO,M&Gresignedduringtheyearandthisawardwilllapse. www.prudential.co.uk AnnualReport2018 Prudential plc 135 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information What performance means for Executive Directors’ pay AtPrudential,remunerationpackagesaredesignedtoensureastrongalignmentbetweenpayandperformance.Asyoucanseefromthe chartswithintheAnnualstatementfromtheChairmanoftheRemunerationCommittee,sustainedgrowthacrossourkeyperformance metricshasdeliveredsubstantialvaluetoourshareholders.Thishasbeenreflectedinboththeannualbonusespaidandthereleaseof long-termincentiveawards,assetoutintheAnnualreportonremuneration. Inparticular,thelong-termincentivesawardedtoExecutiveDirectorsin2016hadstretchingperformanceconditionsattachedtovesting andweredenominatedinsharesorADRs.Thevaluegeneratedforshareholdersthroughsharepricegrowthanddividendspaidoverthe lastthreeyearsisreflectedinthevalueoftheLTIPreleases. Thevalueoftheseperformance-relatedelementsofremunerationisaddedtothefixedpackagesprovidedtoExecutiveDirectorsto calculatethe2018‘singlefigure’oftotalremuneration.Thetotal2018‘singlefigure’fortheGroupChiefExecutiveis13.2percentless thanthetotal2017‘singlefigure’,despitecontinuingstrongbusinessperformanceandhisexceptionalleadershipandpersonal performance.Thisischieflyaresultofalowerlevelofvestingofthe2016PLTIPawards.ThevaluesfortheExecutiveDirectorsduringthe yearareoutlinedinthetablebelow: Executive Director Role MarkFitzPatrick JohnFoley ChiefFinancialOfficer ChiefExecutive, Fixed pay Performance related 2018 salary Pension and benefits 2018 bonus LTIP vesting 2018 single figure 2017 single figure1 £745,000 £275,000 £1,241,000 – £2,261,000 £1,634,000 NicNicandrou2 AnneRichards4 BarryStowe2,5 JamesTurner7 MikeWells M&GPrudential ChiefExecutive,PCA3 ChiefExecutive,M&G ChairmanandCEO,NABU6 GroupChiefRiskOfficer GroupChiefExecutive £781,000 £1,023,000 £249,000 £867,000 £521,000 £1,126,000 £318,000 £654,000 £164,000 £287,000 £239,000 £689,000 £1,186,000 £1,692,000 – £4,935,000 £793,000 £2,133,000 £1,511,000 £1,433,000 – £2,761,000 £347,000 £3,486,000 £3,796,000 £4,802,000 £413,000 £8,850,000 £1,900,000 £7,434,000 £4,597,000 £4,705,000 £3,053,000 £9,541,000 N/A £8,560,000 Notes 1 Revised2017singlefigure,inlinewiththeregulations,reflectingtheactualvalueof2017LTIPreleasesandadditionaldividendspaidassetoutinthenotestothe2017singlefigure tableonpage145. 2 NicNicandrouandBarryStowearepaidintheirlocalcurrencyandexchangeratefluctuationswillthereforeimpactthereportedsterlingvalue. 3 PCAisanabbreviationofPrudentialCorporationAsia. 4 AnneRichardsresignedandsteppeddownfromtheBoardasanExecutiveDirectoron10August2018.HeremploymentwiththeCompanyterminatedon30November2018. 5 BarryStoweretiredfromtheBoardon31December2018.HisemploymentwiththeCompanywillterminateon31December2019. 6 NABUisanabbreviationofNorthAmericanBusinessUnitwhichincludesJacksonNationalLifeandPPMAmerica.NABUisnowdescribedasJacksonHoldings. 7 JamesTurnerwasappointedtotheBoardon1March2018asGroupChiefRiskOfficer.TheremunerationabovewaspaidinrespectofhisserviceasanExecutiveDirector. Aligning 2019 pay to performance TheCommitteeawardedsalaryincreasestotheExecutiveDirectorsfor2019of2percent,whichwasatthelowerendoftherange ofsalaryincreasebudgetsforthewiderworkforce.Nochangeshavebeenmadetoincentiveopportunitiesaswebelieveremuneration packagesremainstronglyalignedwithperformanceoverboththeshortandthelongterm.However,asdiscussedintheAnnual statementfromtheChairmanoftheRemunerationCommitteeintheprevioussection,theCommitteehasreducedtheproportion ofthe2019PLTIPawardswhichwouldvestforthresholdperformance. Remunerationpackagesfor2019aresetoutindetailintheAnnualreportonremunerationandsummarisedbelow: Executive Director Role MichaelFalcon2 MarkFitzPatrick JohnFoley NicNicandrou JamesTurner MikeWells ChairmanandCEO,JacksonHoldings ChiefFinancialOfficer ChiefExecutive,M&GPrudential ChiefExecutive,PrudentialCorporationAsia GroupChiefRiskOfficer GroupChiefExecutive AIP 2019 salary Maximum bonus (% of salary) Bonus deferred (% of bonus) PLTIP award (% of salary)1 US$800,000 £760,000 £797,000 HK$10,930,000 £638,000 £1,149,000 100% 175% 180% 180% 160% 200% 40% 40% 40% 40% 40% 40% 400% 250% 250% 250% 250% 400% Notes 1 ThePLTIPawardissubjecttoathree-yearperformanceperiodandafurthertwo-yearholdingperiod. 2 MichaelFalconwasappointedtotheBoardon7January2019asChairmanandChiefExecutiveOfficer,JacksonHoldingsLLC.Inadditiontohavingamaximumbonusopportunity of100percentofsalaryundertheAIPhewillalsobeeligibletoreceivea10percentshareoftheJacksonbonuspool. 136 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continuedSummary of the current Directors’ remuneration policy TheCompany’sDirectors’remunerationpolicywasapprovedbyshareholdersatthe2017AGM.Thispolicycameintoeffectfollowing theAGMon18May2017andisexpectedtoapplyuntilthe2020AGM,whenshareholderswillbeaskedtoapprovearevisedDirectors’ remunerationpolicy. ThepagesthatfollowpresentasummaryofthecurrentDirectors’remunerationpolicy.Thecompletepolicycanbefoundonourwebsite atwww.prudential.co.uk/investors/governance-and-policies Remuneration for Executive Directors Fixed pay Element Salary Operation TheCommitteereviewssalariesannually,consideringfactorssuchas: — SalaryincreasesforotheremployeesacrosstheGroup; — Theperformanceandexperienceoftheexecutive; — Thesizeandscopeoftherole; — Groupand/orbusinessunitfinancialperformance; — Internalrelativities;and — Externalfactorssuchaseconomicconditionsandmarketdata. Marketdataisalsoreviewedsothatsalariesremaininacompetitiverange, relativetoeachExecutiveDirector’slocalmarket. Benefits ExecutiveDirectorsareofferedbenefitswhichreflecttheirindividual circumstancesandarecompetitivewithintheirlocalmarket,including: — Healthandwellnessbenefits; — Protectionandsecuritybenefits; — Transportbenefits; — Familyandeducationbenefits; — Allemployeeshareplansandsavingsplans; — Relocationandexpatriatebenefits;and — Reimbursedbusinessexpenses(includinganytaxliability)incurred whentravellingoverseasinperformanceofduties. Provision for an income in retirement CurrentExecutiveDirectorshavetheoptionto: — Receivepaymentsintoadefinedcontributionscheme;and/or — Takeacashsupplementinlieuofcontributions. Jackson’sDefinedContributionRetirementPlanhasaguaranteedelement (6percentofpensionablesalary)andadditionalcontributions(uptoa further6percentofpensionablesalary)basedontheprofitabilityofJackson. Opportunity AnnualsalaryincreasesforExecutive Directorswillnormallybeinlinewith theincreasesforotheremployees acrossourbusinessunits.However, thereisnoprescribedmaximum annualincrease. Themaximumpaidwillbethecostto theCompanyofprovidingbenefits. Thecostofbenefitsmayvaryfrom yeartoyearbuttheCommitteeis mindfulofachievingthebestvalue fromproviders. ExecutiveDirectorsareentitled toreceivepensioncontributionsor acashsupplement(orcombination ofthetwo)uptoatotalof25percent ofbasesalary. Inaddition,theChiefExecutive, PrudentialCorporationAsiareceives statutorycontributionsintothe MandatoryProvidentFund. www.prudential.co.uk AnnualReport2018 Prudential plc 137 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationVariable pay Element Operation Annual bonus CurrentlyallExecutiveDirectorsparticipateintheAnnualIncentivePlan(AIP). AIPawardsforallExecutiveDirectors,otherthantheGroupChiefRisk Officer,aresubjecttotheachievementoffinancialandpersonalobjectives. TheGroupChiefRiskOfficer’sperformancemeasuresareentirelybasedon acombinationoffunctionalandpersonalmeasures. Businessunitchiefexecutiveseitherhavemeasuresoftheirbusinessunit’s financialperformanceintheAIPortheymayparticipateinabusinessunit specificbonusplan.Forexample,theChairmanandCEO,NABUcurrently participatesintheJacksonSeniorManagementBonusPoolaswellasin theAIP. Thefinancialmeasuresusedfortheannualbonuswilltypicallyincludeprofit andcashflowtargetsandpaymentsdependontheachievementofminimum capitalthresholds.Jackson’sprofitabilityandotherkeyfinancialmeasures determinethevalueoftheJacksonSeniorManagementBonusPool. Inspecificcircumstances,theCommitteealsohasthepowertorecoverall (orpartof)bonusesforaperiodaftertheyareawardedtoexecutives.These clawbackpowersapplytothecashanddeferredelementsofbonusesmade inrespectofperformancein2015andsubsequentyears. Deferred bonus shares ExecutiveDirectorsarerequiredtodeferapercentage(currently 40percent)oftheirtotalannualbonusintoPrudentialsharesforthreeyears. Thereleaseofawardsisnotsubjecttoanyfurtherperformanceconditions. Prudential Long Term Incentive Plan TheCommitteehastheauthoritytoapplyamalusadjustmenttoall,oraportion of,anoutstandingdeferredawardinspecificcircumstances.From2015,the Committeealsohasthepowertorecoverall,oraportionof,amountsalready paidinspecificcircumstancesandwithinadefinedtimeframe(clawback). CurrentlyallExecutiveDirectorsparticipateinthePrudentialLongTerm IncentivePlan(PLTIP).ThePLTIPhasathree-yearperformanceperiod. Theperformancemeasuresattachedtoeachawardaredependentonthe roleoftheexecutiveandwillbedisclosedintherelevantAnnualreporton remuneration.TheCommitteehastheauthoritytoapplyamalusadjustment toall,oraportionof,anoutstandingawardinspecificcircumstances. For2015andsubsequentyears,theCommitteealsohasthepowerto recoverall,oraportionof,amountsalreadypaidinspecificcircumstances andwithinadefinedtimeframe(clawback). From2017,PLTIPawardsareusuallysubjecttoanadditionaltwo-year holdingperiodfollowingtheendofthethree-yearperformanceperiod. Opportunity TheChiefExecutive,M&Ghasa bonusopportunityofthelowerofsix timessalaryor0.75percentofM&G’s operatingprofit.ForotherExecutive DirectorsthemaximumAIP opportunityisupto200percentof salary.Annualawardsaredisclosed intherelevantAnnualreporton remuneration. InadditiontotheAIP,theChairman andCEO,NABUreceivesa 10percentshareoftheJackson SeniorManagementBonusPool. Themaximumvestingunderthis arrangementis100percentof theoriginaldeferralplusaccrued dividendshares. Thevalueofsharesawardedunder thePLTIP(inanygivenfinancialyear) maynotexceed550percentofthe executive’sannualbasicsalary. Awardsmadeinaparticularyearare usuallysignificantlybelowthislimit andaredisclosedintherelevant Annualreportonremuneration.The Committeewouldconsultwithmajor shareholdersbeforeincreasingaward levelsduringthelifeofthispolicy. ThemaximumvestingunderthePLTIP is100percentoftheoriginalshare awardplusaccrueddividendshares. Share ownership guidelines Theguidelinesforshareownershipareasfollows: — 400percentofsalaryfortheGroupChiefExecutive;and — 250percentofsalaryforotherExecutiveDirectors. Executiveshavefiveyearsfromtheimplementationoftheseincreasedguidelines(orfromthedateoftheirappointment,iflater)tobuild thislevelofownership.SharesearnedanddeferredundertheAIPareincludedincalculatingtheExecutiveDirector’sshareholdingfor thesepurposes.Unvestedshareawardsunderlong-termincentiveplansarenotincludedbutvestedshareawardsunderlong-term incentiveplanswhicharesubjecttothetwo-yearholdingperiodareincluded. ProgressagainsttheshareownershipguidelinesisdetailedintheStatementofDirectors’shareholdingssectionoftheAnnualreport onremuneration. 138 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continuedMalus and clawback policy TheCommitteemayapplyclawbackand/oramalusadjustmenttovariablepayincertaincircumstancesassetoutbelow.TheCommittee candelaythereleaseofawardspendingthecompletionofaninvestigationwhichcouldleadtotheapplicationofmalusorclawback. Circumstances when the Committee may exercise its discretion to apply malus or clawback to an award Malus(appliesinrespectof anyannualbonusorlong-term incentiveaward) Whereabusinessdecisiontakenduringtheperformanceperiodbythebusinessunitbywhichthe participantwasemployedhasresultedinamaterialbreachofanylaw,regulation,codeofpractice orotherinstrumentthatappliestocompaniesorindividualswithinthebusinessunit. Allowsunvestedsharesawarded underdeferredbonusandLTIP planstobeforfeitedorreduced incertaincircumstances. Thereisamateriallyadverserestatementoftheaccountsforanyyearduringtheperformance periodof(i)thebusinessunitinwhichtheparticipantworkedatanytimeinthatyear;and/or (ii)anymemberoftheGroupwhichisattributabletoincorrectinformationabouttheaffairsof thatbusinessunit. Clawback Allowscashandshareawards toberecoveredbeforeorafter releaseincertaincircumstances. AnymatterariseswhichtheCommitteebelievesaffectsormayaffectthereputationofthe CompanyoranymemberoftheGroup. Whereatanytimebeforethefifthanniversaryofthestartoftheperformanceperiod,either (i)thereisamateriallyadverserestatementoftheCompany’spublishedaccountsinrespectofany financialyearwhich(inwholeorpart)comprisedpartoftheperformanceperiod;or(ii)itbecomes apparentthatamaterialbreachofalaworregulationtookplaceduringtheperformanceperiod whichresultedinsignificantharmtotheCompanyoritsreputation,andtheCommitteeconsiders itappropriate,takingaccountoftheextentoftheparticipants’responsibilityfortherelevant restatementorbreach,thatclawbackbeappliedtotherelevantparticipant. ThefullDirectors’remunerationpolicysetsouttheCommittee’spowersinrespectofExecutiveDirectorsjoiningorleavingtheBoard, whereachangeinperformanceconditionsisappropriateorinthecaseofcorporatetransactions(suchasatakeover,mergerorrights issue).Thepolicyalsodescribeslegacylong-termincentiveplansunderwhichsomeExecutiveDirectorscontinuetoholdawards. SubsequenttotheapprovaloftheDirectors’remunerationpolicybyourshareholders,wehavedeterminedthatforPLTIPawards grantedin2019andsubsequentyearstheproportionvestingforthresholdperformancewillbereducedfrom25percentto20percent ofthemaximumopportunity,andexternallyrecruitedExecutiveDirectorsappointedonorafter1March2019willbeofferedpension benefitsof20percentofsalary,ratherthanthecurrentlevelof25percentofsalary. Scenarios of total remuneration ThefollowingchartprovidesanillustrationofthefuturetotalremunerationforeachExecutiveDirectorinrespectoftheirremuneration opportunityfor2019.Threescenariosofpotentialoutcomeareprovidedbasedonunderlyingassumptionsshowninthenotestothe chart.InlinewithchangestoSchedule8ofTheLargeandMedium-sizedCompaniesandGroups(AccountsandReports)(Amendment) Regulations2013whichwouldapplyfromthenextDirectors’remunerationpolicy,wehaveindicatedthemaximumremunerationthat wouldbedeliveredtoeachExecutiveDirectorbya50percentsharepricegrowthduringtherelevantperformanceperiod. TheCommitteeissatisfiedthatthemaximumpotentialremunerationoftheExecutiveDirectorsisappropriate.Prudential’spolicyisto offerExecutiveDirectorsremunerationwhichreflectstheperformanceandexperienceoftheexecutive,internalrelativitiesandGroup and/orbusinessunitfinancialperformance.Inorderforthemaximumillustratedtotalremunerationtobepayable: — FinancialperformancemustexceedtheGroupand/orbusinessunit’sstretchingbusinessplan; — RelativeTSRmustbeatorabovetheupperquartilerelativetothepeergroup; — Thebalancedscorecard,alignedtotheGroup’sstrategicpriorities,mustbefullysatisfied; — Functionalandpersonalperformanceobjectivesmustbefullymet; — PerformancemustbeachievedwithintheGroup’sandbusinessunits’riskframeworkandappetites;and — TheCompany’ssharepricemustgrowby50percentoverthreeyears. www.prudential.co.uk AnnualReport2018 Prudential plc 139 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information£000 12,000 10,000 8,000 6,000 4,000 2,000 8,996 40% 51% 6,463 23% 64% 819 100% 0 13% 9% 1,039 100% i i M n m u m i i M n m u m i M a x m u m I n l i n e w i t h e x p e c t a t i o n s 5,219 55% 25% 20% i M a x m u m 2,892 41% 23% 36% I n l i n e w i t h e x p e c t a t i o n s 5,542 54% 26% 20% i M a x m u m 3,082 41% 23% 36% I n l i n e w i t h e x p e c t a t i o n s 4,320 55% 24% 21% i M a x m u m 2,414 41% 21% 38% I n l i n e w i t h e x p e c t a t i o n s 907 100% i i M n m u m 1,119 100% i i M n m u m 7,501 52% 25% 23% i M a x m u m 4,276 38% 22% 40% I n l i n e w i t h e x p e c t a t i o n s 1,704 100% i i M n m u m 11,035 62% 21% 17% i M a x m u m 5,864 49% 1,843 100% 20% 31% i i M n m u m I n l i n e w i t h e x p e c t a t i o n s Michael Falcon Mark FitzPatrick John Foley James Turner Nic Nicandrou Mike Wells  Fixed  Short-termincentives  Long-termincentives Note Thescenariosinthechartabovehavebeencalculatedonthefollowingassumptions: Fixedpay Basesalaryat1January2019. Minimum In line with expectations Maximum Pensionallowanceat1January2019. Estimatedvalueofbenefitsbasedonamountspaidin2018. ForMichaelFalconthishasbeenbasedonthevalueofbenefits paidtohispredecessor,BarryStowe. NicNicandrouandMichaelFalconarepaidinHK$andUS$ respectivelyandfigureshavebeenconvertedtoGBPforthe purposesofthischart. Annualbonus Nobonuspaid. Long-termincentives (excludesdividends) NoPLTIPvesting. 50%ofmaximumAIP. 100%ofmaximumAIP. Jacksonbonuspoolattheaverage ofthelastthreeyears. Jacksonbonuspoolathighest ofthelastthreeyears. Vestingof62.5%ofawardunder PLTIP(midwaybetweenthreshold andmaximum). Vestingof100%ofaward underPLTIP;plus Sharepricegrowthof50% overthreeyears. 140 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continued Remuneration for Non-executive Directors and the Chairman Non-executive Directors Fees AllNon-executiveDirectorsreceiveabasic feefortheirdutiesasaBoardmember. Additionalfeesarepaidforadded responsibilitiessuchaschairmanshipand membershipofcommitteesoractingasthe SeniorIndependentDirector.Feesarepaid toNon-executiveDirectorsincash.Fees arereviewedannuallybytheBoardwith anychangeseffectivefrom1July. Non-executiveDirectorsarenoteligible toparticipateinannualbonusplansor long-termincentiveplans. If,inaparticularyear,thenumberof meetingsismateriallygreaterthanusual, theCompanymaydeterminethatthe provisionofadditionalfeesisfairand reasonable. Chairman TheChairmanreceivesanannualfee fortheperformanceoftherole.On appointment,thefeemaybefixedfor aspecifiedperiodoftime.Feeswill otherwisebereviewedannuallywith anychangeseffectivefrom1July. TheChairmanisnoteligibletoparticipate inannualbonusplansorlong-term incentiveplans. Benefits Share ownership guidelines TravelandexpensesforNon-executive Directorsareincurredinthenormalcourse ofbusiness,forexample,inrelationto attendanceatBoardandCommittee meetings.Thecostsassociatedwiththese areallmetbytheCompany. ItisexpectedthatNon-executiveDirectors willholdshareswithavalueequivalentto onetimestheannualbasicfee(excluding additionalfeesforchairmanshipand membershipofanycommittees). Non-executiveDirectorsareexpectedto attainthislevelofshareownershipwithin threeyearsoftheirappointment. TheChairmanmaybeofferedbenefits including: — Healthandwellnessbenefits; — Protectionandsecuritybenefits; TheChairmanhasashareownership guidelineofonetimeshisannualfeeand isexpectedtoattainthislevelofshare ownershipwithinfiveyearsofthedate ofhisappointment. — Transportbenefits; — Reimbursementofbusinessexpenses (andanyassociatedtaxliabilities) incurredwhentravellingoverseas inperformanceofduties;and — Relocationandexpatriatebenefits (whereappropriate). TheChairmanisnoteligibletoreceive apensionallowanceortoparticipateinthe Group’semployeepensionschemes. InsettingtheDirectors’remunerationpolicy,theCommitteeconsidersarangeoffactorsincluding: Statement of consideration of conditions elsewhere in the Group AcrosstheGroup,remunerationisreviewedregularlywiththeintentionthatallemployeesarepaidappropriatelyinthecontextoftheir localmarketandgiventheirindividualskills,experienceandperformance.Eachbusinessunit’ssalaryincreasebudgetissetwith referencetolocalmarketconditions.TheCommitteeconsiderssalaryincreasebudgetsineachbusinessunitwhendeterminingthe salariesofExecutiveDirectors. PrudentialdoesnotconsultwithemployeeswhensettingtheDirectors’remunerationpolicy.Prudentialisaglobalorganisationwith employeesandagentsinmultiplebusinessunitsandgeographies.Assuch,therearepracticalchallengesassociatedwithconsultingwith employeesdirectlyonthismatter.Asmanyemployeesarealsoshareholders,theyareabletoparticipateinbindingvotesonthe Directors’remunerationpolicyandannualvotesontheAnnualreportonremuneration. Statement of consideration of shareholder views TheCommitteeandtheCompanyundertakeregularconsultationwithkeyinstitutionalinvestorsontheremunerationpolicyand itsimplementation.ThisengagementisledbytheRemunerationCommitteeChairandisanintegralpartoftheCompany’sinvestor relationsprogramme.TheCommitteeisgratefultoshareholdersfortheirfeedbackandtakesthisintoaccountwhendetermining executiveremuneration.AssetoutintheAnnualstatementfromtheChairmanoftheRemunerationCommittee,feedbackfrom shareholdersandtheiradvisersinformedanumberofchangestotheCompany’s2019remunerationarrangements. www.prudential.co.uk AnnualReport2018 Prudential plc 141 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationAnnual report on remuneration TheBoardhasestablishedAudit,Remuneration,RiskandNomination&GovernanceCommitteesasprincipalstandingcommittees oftheBoard.ThesecommitteesformakeyelementoftheGroupgovernanceframework. The operation of the Remuneration Committee Members AnthonyNightingale(ChairoftheCommittee) KaiNargolwala PhilipRemnant ThomasWatjen FieldsWicker-Miurin(membersince3September2018) IndividualDirectors’attendanceatmeetingsthroughout2018issetoutintheGovernancesection. Role and responsibility TheroleandresponsibilitiesoftheCommitteearesetoutinitstermsofreference,whicharereviewedbytheCommitteeandapproved bytheBoardonanannualbasis,andwhichcanbefoundontheCompany’swebsite.TheCommittee’sroleistoassisttheBoardin meetingitsresponsibilitiesregardingthedetermination,implementationandoperationoftheoverallremunerationpolicyfortheGroup, includingtheremunerationoftheChairmanandExecutiveDirectors,aswellasoverseeingtheremunerationarrangementsofotherstaff withinitspurview. TheprincipalresponsibilitiesoftheCommitteeare: — DeterminingandrecommendingtotheBoardforapproval,theframeworkandpolicyfortheremunerationoftheChairman,Executive DirectorsandothermembersoftheGroupExecutiveCommittee; — Approvingthedesignofperformance-relatedpayschemesoperatedfortheExecutiveDirectorsandothermembersoftheGroup ExecutiveCommittee,anddeterminingthetargetsandindividualpayoutsundersuchschemes; — ReviewingthedesignanddevelopmentofallshareplansrequiringapprovalbytheBoardand/ortheCompany’sshareholders; — ApprovingtheshareownershipguidelinesfortheChairmanandExecutiveDirectorsandothermembersoftheGroupExecutive Committee,andmonitoringcompliance; — ReviewingandapprovingindividualpackagesfortheExecutiveDirectorsandothermembersoftheGroupExecutiveCommittee, andthefeesoftheChairmanandtheNon-executiveDirectorsoftheGroup’smaterialsubsidiaries; — ReviewingandapprovingpackagestobeofferedtonewlyrecruitedExecutiveDirectorsandothermembersoftheGroupExecutive Committee; — ReviewingandapprovingthestructureandquantumofanyseverancepackageforExecutiveDirectorsandothermembersofthe GroupExecutiveCommitteetoensuretheyarefairanddonotrewardfailure; — EnsuringtheprocessforestablishingremunerationpolicyistransparentandconsistentwiththeGroup’sriskframeworkand appetites,encouragingstrongriskmanagementandsolvencymanagementpractices; — ReviewingtheworkforceremunerationpracticesandrelatedpoliciesacrosstheGroupwhensettingtheremunerationpolicyfor ExecutiveDirectors,aswellasthealignmentofincentivesandawardswithculture; — MonitoringtheremunerationandriskmanagementimplicationsofremunerationofseniorexecutivesacrosstheGroup,other selectedrolesandthosewithanopportunitytoearninexcessof£1millioninaparticularyear;and — OverseeingtheimplementationoftheGroupremunerationpolicyforthoseroleswithinscopeofthespecificarrangementsreferred toinArticle275ofSolvencyII. 142 Prudential plc AnnualReport2018 www.prudential.co.uk In2018,theCommitteemetfivetimes.Keyactivitiesateachmeetingareshowninthetablebelow: Meeting Key activities Early March 2018 Approvethe2017Directors’remunerationreportandtheGenderpaygapreport;consider2017bonusawards forExecutiveDirectors;considervestingofthelong-termincentiveawardswithaperformanceperiodending on31December2017;approve2018long-termincentiveawards,performancemeasuresandplan documentation;noteanupdateonregulationaffectingremuneration;andreviewtheappointmentofthe Committee’sindependentadviser. Mid-March 2018 Confirm2017annualbonusesandthevestingoflong-termincentiveawardswithaperformanceperiodending on31December2017,inlightofauditedfinancialresults. June 2018 September 2018 December 2018 Considerperformanceforoutstandinglong-termincentiveawards,basedonthehalf-yearresults;review theremunerationofseniorexecutivesacrosstheGroup,employeeswitharemunerationopportunityover £1millionperannumandemployeeswithinthescopeoftheSolvencyIIremunerationrules;reviewprogress towardsshareownershipguidelinesbytheChairman,ExecutiveDirectorsandotherGroupExecutive Committeemembers;approvetheexpenseapprovalprocessfortheGroupChiefExecutiveandChairman; andapprovetheChairman’sfees. Reviewproposed2019remunerationarrangementsforExecutiveDirectorsaheadofconsultationwith shareholders;noteanupdateonregulationaffectingremuneration;reviewthepotentialimpactofthedemerger onremunerationarrangements;reviewgenderpaygapreportingdata;andapprovetheCommittee’sterms ofreferenceforrecommendationtotheBoard. ReviewlevelofparticipationintheCompany’sall-employeeshareplansanddilutionlevelsresultingfromthe Company’sshareplans;considerthepotentialimpactofthedemergeronremunerationarrangements;approve GroupExecutiveCommitteemembers’2019salariesandincentiveopportunities;considertheannualbonus measuresandtargetstobeusedin2019;reviewaninitialdraftofthe2018Annualreportonremuneration; approvetheCommittee’s2019ScheduleofBusiness;approvethefeesforindependentnon-executivedirectors ofMaterialSubsidiaries;andnoteanupdateonregulationaffectingremuneration. Additionally,anumberofresolutionsinwritingwereapprovedbytheCommitteebetweenthesemeetingsrelatingtotheapprovalofthe SolvencyIIRemunerationPolicyStatementcoveringthe2017financialyear;newExecutiveDirectors’remunerationarrangementsand separationarrangementsforthoseExecutiveDirectorswhosteppeddownfromtheBoard;joiningarrangementsforthenewChairman andChiefExecutiveOfficer,NABU;andtheM&GPrudentialChairman’sfee. TheChairmanandtheGroupChiefExecutiveattendmeetingsbyinvitation.TheCommitteealsohadthebenefitofadvicefrom: — GroupChiefRiskOfficer; — ChiefFinancialOfficer; — GroupHumanResourcesDirector;and — DirectorofGroupRewardandEmployeeRelations. IndividualsareneverpresentwhentheirownremunerationisdiscussedandtheCommitteeisalwayscarefultomanagepotential conflictsofinterestwhenreceivingviewsfromExecutiveDirectorsorseniormanagementaboutexecutiveremunerationproposals. During2018,DeloitteLLPwastheindependentadvisertotheCommittee.DeloittewasappointedbytheCommitteein2011following acompetitivetenderprocess.Aspartofthisprocess,theCommitteeconsideredtheservicesthatDeloitteprovidedtoPrudentialandits competitors,aswellasotherpotentialconflictsofinterest.DeloitteisamemberoftheRemunerationConsultants’Groupandvoluntarily operatesundertheircodeofconductwhenprovidingadviceonexecutiveremunerationintheUK.Deloitteregularlymeetswiththe ChairoftheCommitteewithoutmanagementpresent.TheCommitteeiscomfortablethattheDeloitteengagementpartnerandteam providingremunerationadvicetotheCommitteedonothaveconnectionswithPrudentialthatmayimpairtheirindependenceand objectivity.ThetotalfeespaidtoDeloittefortheprovisionofindependentadvicetotheCommitteein2018were£48,400(2017: £56,000)chargedonatimeandmaterialsbasis.During2018,DeloittegavePrudentialmanagementadviceonremuneration,aswellas providingguidanceoncapitaloptimisation,digitalandtechnology,taxation,internalaudit,realestate,globalmobilityandotherfinancial, riskandregulatorymatters.RemunerationadviceisprovidedbyanentirelyseparateteamwithinDeloitte.Assetoutinthetableabove, theCommitteereviewedDeloitte’sappointmentduring2018andconsideredDeloittetobeindependent. Inaddition,managementreceivedexternaladviceanddatafromanumberofotherproviders.Thisincludedmarketdataandlegal counsel.Thisadvice,andtheseservices,arenotconsideredtobematerial. Duringtheyear,theCompanyhascompliedwiththeappropriateprovisionsoftheUKCorporateGovernanceCoderegardingDirectors’ remuneration. www.prudential.co.uk AnnualReport2018 Prudential plc 143 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationTable of 2018 Executive Director total remuneration (the ‘single figure’) £000s MarkFitzPatrick JohnFoley NicNicandrou1,6 AnneRichards2 BarryStowe3,6 JamesTurner4 MikeWells5 Total Of which: 2018 salary 745 781 1,023 249 867 521 1,126 2018 taxable benefits* 89 123 396 102 70 109 407 2018 total bonus 1,241 1,186 1,692 – 4,935 793 2,133 Amount deferred into Prudential shares† Amount paid in cash 2018 LTIP releases‡ 2018 pension benefits§ Total 2018 remuneration the ‘single figure’¶ 745 712 1,015 – 2,961 476 1,280 496 474 677 – 1,974 317 853 – 1,511 1,433 – 2,761 347 3,486 186 195 258 62 217 130 282 2,261 3,796 4,802 413 8,850 1,900 7,434 5,312 1,296 11,980 7,189 4,791 9,538 1,330 29,456 *Benefitsinclude(whereprovided)thecostofprovidingtheuseofacaranddriver,medicalinsurance,securityarrangementsandrelocation/expatriatebenefits. †Thedeferredpartofthebonusissubjecttomalusandclawbackinaccordancewiththemalusandclawbackpoliciesbutnofurtherconditions. ‡Inlinewiththeregulations,theestimatedvalueofthe2018PLTIPreleaseshasbeencalculatedbasedontheaverageshare/ADRpriceoverthelastthreemonthsof2018(£15.34/US$39.41) andincludestheaccumulateddividendsdeliveredintheformofshares/ADRs.TheactualvalueofPLTIPs,basedonthesharepriceonthedateawardsarereleased,willbeshowninthe 2019report.InlinewiththeearlyadoptionofrequirementsundertheUKCompanies(MiscellaneousReporting)Regulations2018,itisestimatedthat15.3percentofthevalueofthe 2018LTIPreleasesisattributabletosharepricegrowthoverthevestingperiodasawardsweregrantedusingashare/ADRpriceof£12.99/US$37.29in2016.TheCommitteeconcluded thatnodiscretionwillbeappliedindeterminingtheremunerationresultingfromthe2018LTIPreleasesasaresultofsharepriceappreciation. §2018pensionbenefitsincludecashsupplementsforpensionpurposesandcontributionsintoDCschemesasoutlinedonpage147. ¶Eachremunerationelementisroundedtothenearest£1,000andtotalsarethesumoftheseroundedfigures.Totalremunerationiscalculatedusingthemethodologyprescribedby Schedule8ofStatutoryInstrument2013No.1981–TheLargeandMedium-sizedCompaniesandGroups(AccountsandReports)(Amendment)Regulations2013. Notes 1 TofacilitateNicNicandrou’srelocationtoHongKong,Nic’sbenefitsinclude£267,000tocoveraccommodation. 2 AnneRichardssteppeddownfromtheBoardon10August2018.TheremunerationabovewaspaidinrespectofherserviceasanExecutiveDirector. 3 BarryStoweretiredfromtheBoardon31December2018. 4 JamesTurnerwasappointedtotheBoardon1March2018. 5 TofacilitatehisappointmentasGroupChiefExecutiveandmovetotheUKin2015,MikeWells’sbenefitsinclude£311,000tocovermortgageinterest,whichceasedeffective 30November2018. 6 BarryStoweandNicNicandrouarepaidintheirlocalcurrencyandexchangeratefluctuationswillthereforeimpactthereportedsterlingvalue. 144 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continued Table of 2017 Executive Director total remuneration (the ‘single figure’) £000s MarkFitzPatrick1 JohnFoley PennyJames2 NicNicandrou3,8 AnneRichards4 BarryStowe5,8 MikeWells6 TonyWilkey7 Total 2017 taxable benefits* 18 115 81 303 153 59 493 456 2017 total bonus 1,197 1,283 – 1,414 2,400 5,354 2,072 787 Of which: Amount deferred into Prudential shares† Amount paid in cash 2017 LTIP releases‡ 2017 pension benefits§ Total 2017 remuneration the ‘single figure’¶ 718 770 – 848 1,440 3,212 1,243 472 479 513 – 566 960 2,141 829 315 – 2,243 – 1,901 – 3,028 4,616 2,819 84 191 119 218 100 220 276 123 1,634 4,597 678 4,705 3,053 9,541 8,560 4,675 1,678 14,507 8,703 5,803 14,607 1,331 37,443 2017 salary 335 765 478 869 400 880 1,103 490 5,320 *Benefitsinclude(whereprovided)thecostofprovidingtheuseofacaranddriver,medicalinsurance,securityarrangementsandrelocation/expatriatebenefits. †Thedeferredpartofthebonusissubjecttomalusandclawbackinaccordancewiththemalusandclawbackpoliciesbutnofurtherconditions. ‡Inlinewiththeregulations,theestimatedvalueof2017LTIPreleaseshasbeenrecalculatedbasedontheactualshare/ADRpriceonthedateawardswerereleased,being£17.47/US$49.24 fortheMarchreleaseandashare/ADRpriceof£18.41/US$49.38intheJunerelease.TherestatedvalueofthoseawardsreleasedinJunealsoreflectsdividendspaidonthoseawardsin thepreviousmonth. §2017pensionbenefitsincludecashsupplementsforpensionpurposesandcontributionsintoDefinedContribution(DC)schemes. ¶Eachremunerationelementisroundedtothenearest£1,000andtotalsarethesumoftheseroundedfigures.Totalremunerationiscalculatedusingthemethodologyprescribedby Schedule8ofStatutoryInstrument2013No.1981–TheLargeandMedium-sizedCompaniesandGroups(AccountsandReports)(Amendment)Regulations2013. Notes 1 MarkFitzPatrickwasappointedtotheBoardon17July2017. 2 PennyJamessteppeddownfromtheBoardon30September2017.TheremunerationabovewaspaidinrespectofherserviceasanExecutiveDirector. 3 TofacilitateNicNicandrou’srelocationtoHongKongtotakeuphisnewroleasChiefExecutive,PrudentialCorporationAsia,Nic’sbenefitsincluderelocationsupportbeingtemporary accommodationof£126,000andtaxandimmigrationadviceof£33,000. 4 TofacilitateherappointmentasChiefExecutive,M&G,in2016AnneRichards’sbenefitsincludetravelcostsfromAnne’shomeinEdinburghtoLondonof£15,000. 5 BarryStowe’sbonusfigureexcludesacontributionof£16,200fromaprofitsharingplanwhichhasbeenmadeintoa401(k)retirementplaninrespectofhisroleasChairman&CEO, NABU.Thisisincludedunder2017pensionbenefits. 6 TofacilitatehisappointmentasGroupChiefExecutiveandmovetotheUKin2015,MikeWells’sbenefitsinclude£340,000tocovermortgageinterestand£37,000tocoverhomeleaveflights. 7 TonyWilkeysteppeddownfromtheBoardon17July2017.TheremunerationabovewaspaidinrespectofhisserviceasanExecutiveDirector.Hisbenefitsinclude£148,000for housing,£24,000forhomeleaveflightsanda£235,000ExecutiveDirectorLocationAllowance.TwooftheLTIPreleasesrelatetohispreviousrole,priortohisserviceasan ExecutiveDirector. 8 BarryStowe,TonyWilkeyand,followinghisappointmentasChiefExecutive,PrudentialCorporationAsia,NicNicandrouarepaidintheirlocalcurrencyandexchangerate fluctuationswillthereforeimpactthereportedsterlingvalue. www.prudential.co.uk AnnualReport2018 Prudential plc 145 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Remuneration in respect of performance in 2018 Base salary ExecutiveDirectors’salarieswerereviewedin2017withchangeseffectivefrom1January2018.WhentheCommitteetookthese decisionsitconsidered: — Thesalaryincreasebudgetsforotheremployees,whichvaryacrossourbusinessunits,reflectinglocalmarketconditions; — TheperformanceandexperienceofeachExecutiveDirector; — TherelativesizeofeachExecutiveDirector’srole;and — TheperformanceoftheGroup. Asreportedlastyear,aftercarefulconsiderationbytheCommittee,allExecutiveDirectorsreceivedasalaryincreaseof2percent. The2018salaryincreasebudgetsforotheremployeesacrossourbusinessunitswerebetween2.5percentand10percent.Nochanges weremadetoExecutiveDirectors’maximumopportunitiesundereithertheannualincentiveorthelong-termincentiveplans. Toprovidecontextforthemarketreview,informationwasalsodrawnfromthefollowingmarketreferencepoints: Executive MarkFitzPatrick ChiefFinancialOfficer Role Benchmark(s) used to assess remuneration JohnFoley ChiefExecutive,M&GPrudential NicNicandrou ChiefExecutive,Prudential CorporationAsia AnneRichards ChiefExecutive,M&G BarryStowe Chairman&CEO,NABU JamesTurner1 GroupChiefRiskOfficer MikeWells GroupChiefExecutive — FTSE40 — Internationalinsurancecompanies — FTSE40 — Internationalinsurancecompanies — WillisTowersWatsonAsianInsuranceSurvey — McLaganUKInvestmentManagementSurvey — Internationalinsurancecompanies — WillisTowersWatsonUSFinancialServicesSurvey — LOMAUSInsuranceSurvey — FTSE40 — FTSE50insurers — FTSE40 — Internationalinsurancecompanies Note 1 JamesTurnerwasappointedtotheroleofGroupChiefRiskOfficerandtotheBoardon1March2018.Hissalarywasreviewedonappointment. Asaresult,ExecutiveDirectorsreceivedthefollowingsalaryincreases: Executive Director MarkFitzPatrick1 JohnFoley NicNicandrou2 AnneRichards3 BarryStowe JamesTurner4 MikeWells 2017 salary 2018 salary £730,000 £765,000 HK$10,500,000 £400,000 US$1,134,000 N/A £1,103,000 £745,000 £781,000 HK$10,710,000 £408,000 US$1,157,000 £625,000 £1,126,000 Notes 1 MarkFitzPatrickwasappointedChiefFinancialOfficeron17July2017.Theannualised2017salaryabovewaspaidinrespectofhisserviceasChiefFinancialOfficer. 2 NicNicandrouwasappointedChiefExecutive,PrudentialCorporationAsiaon17July2017.Theannualised2017salaryabovewaspaidinrespectofhisserviceasChiefExecutive, PrudentialCorporationAsia. 3 AnneRichardssteppeddownfromtheBoardon10August2018.HeremploymentwiththeCompanyendedon30November2018andher2018annualisedsalaryisillustratedabove. 4 JamesTurnerwasappointedtotheBoardon1March2018.Theannualised2018salaryabovewaspaidinrespectofhisserviceasGroupChiefRiskOfficer. 146 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continuedPension entitlements Pensionprovisionsin2018were: Executive Director BarryStowe NicNicandrou 2018 pension arrangement Pensionsupplementof25percentofsalary, partofwhichispaidasacontributiontoan approvedUSretirementplan. Life assurance provision Twotimessalary Pensionsupplementinlieuofpensionof 25percentofsalaryandaHK$18,000 employerpaymenttotheHongKong MandatoryProvidentFund. Eighttimessalary UK-basedexecutives Pensioncontributiontodefinedcontribution planand/orpensionsupplementinlieuof pensionof25percentofsalary. Uptofourtimessalaryplusadependants’ pension JohnFoleypreviouslyparticipatedinanon-contributorydefinedbenefitschemethatwasopenatthetimehejoinedtheCompany. Theschemeprovidedanaccrualof1/60thoffinalpensionableearningsforeachyearofpensionableservice.Johnreceivedpension paymentsof£15,636perannumwhichincreasedto£16,061perannumfrom1April2018,inlinewiththeConsumerPricesIndex. ThepensionwillcontinuetobesubjecttostatutoryincreasesinlinewiththeConsumerPricesIndex. Annual bonus outcomes for 2018 Target setting ForthefinancialAIPmetricswhichcomprise80percentofthebonusopportunityforallExecutiveDirectorsapartfromtheGroupChief RiskOfficer,theperformancerangesaresetbytheCommitteepriorto,oratthebeginningof,theperformanceperiod.Theserangesare basedontheannualbusinessplansapprovedbytheBoardandreflecttheambitionsoftheGroupandbusinessunits,inthecontextof anticipatedmarketconditions. Personalobjectivescomprise20percentofthebonusopportunityforallExecutiveDirectorsapartfromtheGroupChiefRiskOfficer,for whomthisaccountsfor50percentofthetotalbonusopportunity.Theseobjectivesareestablishedatthestartoftheyearandreflectthe Company’sStrategicPrioritiessetbytheBoard. InlinewiththeremunerationrequirementsofSolvencyII,functionalobjectivesaccountfortheremaining50percentoftheGroupChief RiskOfficer’sbonusopportunity.ThesearebasedontheGroupRiskPlanandaredevelopedwithinputfromtheChairmanoftheGroup RiskCommittee. AIPpaymentsaresubjecttomeetingSolvencyIIminimumcapitalthresholdswhicharealignedtotheGroupandbusinessunit riskframeworkandappetites(asadjustedforanyGroupRiskCommitteeand/orbusinessunitriskcommitteesapproved counter-cyclicalbuffers). TheCommitteealsoseeksadvicefromtheGroupRiskCommitteeonriskmanagementconsiderationstobeappliedtoremuneration architectureandperformancemeasures.Thisistoensureriskmanagementcultureandconductisappropriatelyreflectedinthedesign andoperationofExecutiveDirectors’remuneration. ExecutiveDirectors’2018bonusesweredeterminedbytheachievementoffourGroupmeasures,namelyoperatingprofit,freesurplus, EEVnewbusinessprofitandcashflow,whicharealignedtotheGroup’sgrowthandcashgenerationfocus. IncompliancewithSolvencyII,theweightingsoftheGroupChiefRiskOfficer’sAIPperformancetargetsrelatetoacombinationof functionalandpersonalmeasuresonly. www.prudential.co.uk AnnualReport2018 Prudential plc 147 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationPerformance assessment TheCommitteedeterminestheoverallvalueofthebonus,takingaccountoftheinputsdescribedaboveandanyotherfactorswhichit considersrelevant.Thetablebelowillustratestheweightingofperformancemeasuresfor2018andthelevelofachievementunderthe AIP.ThetotalbonusoutcomesreflectthestrongperformanceduringtheyearasdiscussedinthissectionandintheAnnualStatement fromtheChairmanoftheRemunerationCommittee. Weighting of measures (% of total bonus opportunity) Achievement against performance measures Group financial measures Business unit financial measures Personal/ functional objectives Financial measures (%) Personal/ functional objectives (%) 2018 AIP outcome1 (% of total bonus opportunity) 80% 20% 20% 20% 80% – 80% – 60% 60% 60% – – – 20% 20% 20% 20% 20% 100% 20% 94% 82% 94% N/A 94% N/A 94% 99% 92% 84% N/A 83% 95% 96% 95% 84% 92% nil 92% 95% 95% Executive Director MarkFitzPatrick JohnFoley NicNicandrou AnneRichards2 BarryStowe3 JamesTurner MikeWells Notes 1 Allbonusawardsaresubjectto40percentdeferralforthreeyearsandthedeferredbonuswillbepaidinPrudentialplcsharesorADRs. 2 AnneRichardssteppeddownfromtheBoardon10August2018.HeremploymentwiththeCompanyendedon30November2018.No2018bonuswasawarded. 3 BarryStoweretiredfromtheBoardon31December2018andremainedeligibletoreceivehis2018AIPaward.BarryStoweisalsoeligibletoreceive10percentoftheJackson bonuspool. Financial performance TheCommitteereviewedperformanceagainsttheperformancerangesatitsmeetinginMarch2019.2018Groupoperatingprofitand GroupfreesurplusgenerationexceededthestretchingtargetsestablishedbytheBoard.Allofourbusinessunitsachievedtarget remittanceslevelsand,althoughlowerthanthepriorperiod,weachievedourobjectivetobalancenetremittancessufficienttocoverthe dividendandcorporatecosts,withreinvestmentinprofitableopportunitieswithinthebusinessunits,andmaintainedsignificantcash stockatthecentre.ThebusinessunitremittancescontributedtoGroupcashflow,whichapproachedthemaximumtarget.GroupEEV newbusinessprofitwasbetweenthresholdandplan. TheCommitteeconsideredareportfromtheGroupChiefRiskOfficerwhichhadbeenapprovedbytheGroupRiskCommittee.This reportconfirmedthatthe2018resultswereachievedwithintheGroup’sandbusinessunits’riskframeworkandappetite.TheGroup ChiefRiskOfficeralsoconsideredtheeffectivenessofriskmanagementandinternalcontrols,andspecificactionstakentomitigaterisks, particularlywherethesemaybeattheexpenseofprofitsorsales.ThereportalsoconfirmedthattheGroupmetSolvencyIIminimum capitalthresholdswhichwerealignedtotheGroupandbusinessunitriskframeworkandappetites.TheGroupChiefRiskOfficer’s recommendationsweretakenintoaccountbytheCommitteewhendeterminingAIPoutcomesforExecutiveDirectors. Thelevelofperformancerequiredforthreshold,planandmaximumpaymentagainsttheGroup’s2018AIPfinancialmeasuresandthe resultsachievedaresetoutbelow. 2018 AIP measure Groupoperatingprofit Groupfreesurplusgenerated Groupcashflow GroupEEVnewbusinessprofit Weighting Threshold (£m) Plan (£m) Maximum (£m) Achievement (£m) 35% 30% 20% 15% 3,691 3,235 (237) 3,663 3,991 3,370 10 3,897 4,290 3,572 93 4,053 4,827 4,047 58 3,877 TheCommitteehadregardtotheachievementagainsttheperformancemeasuresandtheGroupChiefRiskOfficer’sreportanddecided nottoapplyadiscretionaryadjustmenttothearithmeticoutcomeunderthefinancialelementofthe2018bonus.TheBoardbelievesthat, duetothecommercialsensitivityofthebusinessunittargets,disclosingfurtherdetailsofthesetargetsmaydamagethecompetitive positionoftheGroup. 148 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continuedPersonal performance AssetoutinourDirectors’remunerationpolicy,aproportionoftheannualbonusforeachExecutiveDirectorisbasedonthe achievementofpersonalobjectivesincluding: — Theexecutivemeetingtheirindividualconductandcustomermeasures; — Theexecutive’scontributiontoGroupstrategyasamemberoftheBoard;and — Specificgoalsrelatedtothebusinessorfunctionforwhichtheyareresponsibleandprogressonmajorprojectsincludingthe demerger. AttheendoftheyeartheCommitteeconsideredtheperformanceofeachExecutiveDirectoragainstobjectivesestablishedatthestart oftheyear.AtitsmeetinginMarch2019itconcludedthattherehadbeenahighlevelofperformanceagainstthese2018objectives,as summarisedbelow.Allexecutivesmettheirindividualconductmeasuresandtherewasahighlevelofindividualcontributionmadeby eachExecutiveDirectortotheachievementofGroupstrategyduring2018. Business Overview of objectives 2018 performance against objectives GroupHeadOffice Prudential CorporationAsia andAfrica Objectivesincluded progressingthedemergerof theM&GPrudentialbusiness fromPrudentialplc,developing relationshipswithstakeholders, enhancingexternalpublications, continueddevelopmentof executivebenchstrengthand leveragingdigitalopportunities. Objectivesincludedleveraging digitalopportunities, diversifyingdistribution channels,continued developmentofexecutive benchstrength,developing EastspringInvestments andgrowingtheGroup’s Africafootprint. — AnnouncedthedemergerofM&GPrudentialfromPrudentialplcresulting intwoseparately-listedcompanies,eachwithitsowndistinctinvestment prospectsinordertofurtherstrengthentwoalreadystrongbusinessesfor thebenefitofcustomers; — AnnouncedthattheHongKongInsuranceAuthoritywouldbethe Group-widesupervisorafterthedemergerofM&GPrudential; — Raised£1.6billionofsubordinateddebt,withsubstitutionclausestobe activatedondemerger,supportingthecapitalrebalancingacross PrudentialplcandM&GPrudential;and — WontheInsurancecategoryofManagementToday’s‘Britain’sMost AdmiredCompanies’awardforthesecondconsecutiveyear. — EnteredanewpartnershipwithAlkanzaandbuiltarobo-adviceplatform tocreatebespokeportfoliosforourwealthmanagementclientsinTaiwan; — LaunchedourinnovativeandexclusivepartnershipwithBabylonHealth tobringacomprehensivesetofdigitalhealthtoolstoourcustomerswhich ispartofourambitiontomakehealthcaremoreaccessibleandaffordable inAsia; — EstablishedEastpring’swhollyforeign-ownedenterpriseinShanghai andextendedourassetmanagementpresencetoThailandfollowing theacquisitionofTMBAssetManagement; — EastspringInvestmentsnamedbothlargestretailassetmanagerand largestinstitutionalassetmanagerinAsia,excludingJapan,intheAsia AssetManagementannualrankings; — Wontophonoursinthisyear’sAsianInvestor’sInstitutionalExcellence Awards;and — Extendedourlong-termpartnershipwithStandardCharteredBankin Ghanaandsignedalong-termexclusivepartnershipwithZambia’slargest retailbank,ZambiaNationalCommercialBankPlctoenableourproducts tobeofferedtomorethanamillionnewcustomersacrossthecountry. www.prudential.co.uk AnnualReport2018 Prudential plc 149 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationBusiness Overview of objectives 2018 performance against objectives NorthAmerican BusinessUnit Objectivesincludedleveraging digitalopportunities,developing ourproductrangeandfocusing oncorebusinessareas. — LaunchedJackson’sFinancialFreedomForLifecampaigntoencourage Americanstosignupforanannuitythatwillprotecttheminretirement; — CollaboratedwiththeEnvestnetInsuranceExchangetoofferourproducts onitsplatform; — JacksonlaunchedMarketProtectorandMarketProtectorAdvisory,two newfixedannuitieswithindex-linkedinteresttoprovideconsumerswith acombinationoftax-deferredinvestmentgrowth,protectionfrommarket riskandtheflexibilitytoadapttochangingneedsinretirement; — EnteredintoakeydistributionpartnershipwithStateFarm,further strengtheningourmarket-leadingdistributionfootprint;and — WontheContactCentreWorldClassCXCertificationandHighest CustomerServicefortheFinancialIndustryawardsbyTheServiceQuality MeasurementGroup,Inc. — Reinsured£12billionofUKannuitypoliciesandcompletedthefirststages attheHighCourtofEnglandandWalesforthetransferofPrudentialUK annuitiestoRothesayLifePlc; — EstablishedanewM&GPrudentialleadershipteam,implementedanew governancemodelandbuiltasetofunifiedcorporatesupportservicesin preparationfordemergerfromPrudentialplc; — Introducedanewdigitalserviceforinvestmentbondcustomerswhichhas reducedcashwithdrawalwaitingtimesbyalmost80percent;and — LaunchedtheLuxembourgSICAVfundrangewith£21billionassetsunder managementasaninvestmentininternationalgrowthandtominimise disruptionofBrexitforcustomers. M&GPrudential Objectivesincludedcompleting thesaleoftheshareholder annuityportfoliotoRothesay LifePlc,progressingthe demergeroftheM&GPrudential businessfromPrudentialplc, continuingtobuildpositive relationshipswithregulators, leveragingdigitalopportunities, developingourrangeof productsandinvestment offerings,andcontinued developmentofexecutive benchstrength. Functional performance TheChairoftheGroupRiskCommitteeundertakestheassessmentofperformanceagainstfunctionalobjectivesfortheGroupChief RiskOfficer.2018achievementissummarisedbelow: Overview of functional objectives 2018 performance against objectives DefiningandmaintainingaGroup-wideriskpolicy, appetiteandbusinessunitlimitsandtriggers framework,andoversight/controllingofadherenceto thisframework. EnsuringtheGroupRiskFunctionmaintains appropriateriskoversightacrosstheGroup,and enablingtheGroupRiskCommitteeandBoardto dischargetheirresponsibilitiesinrespectofrisk management. Deliveringregulatoryrequirements,includingthose requiredunderSolvencyII,theGroup’sOwnRiskand SolvencyAssessment,andthoserelatingtothe Group’sdesignationasaGlobalSystemicallyImportant Insurer. Providingriskguidance,opinionandassuranceon criticaltransformationactivity,includingthedemerger. — Successfullyenhancedanappropriatelydefinedsystemofpolicies,risk appetitesandlimits.ProvidedstrongoversightofGroup-wideadherence inaccordancewiththerequirementsoftheGroupRiskMandate. — ProvidedkeyinsightandanalysisonemergingissuestotheGroupRisk CommitteeandBoardthroughouttheyear,facilitatingtheperformance oftheirrespectiveduties. — Strengthenedfocusonareasofstrategicrisk,significantlyenhancing Group-widetransformationoversightdeliveringassurance,riskguidance andopinionsoncriticaltransformationactivity. — Deliveredanextensivesetofregulatorydeliverables,includingtheGroup’s ORSAReport,SystemicRiskManagementPlan,LiquidityRisk ManagementPlanandRecoveryPlan.Ensuredappropriateinternalmodel validationperSolvencyIIrequirements. — Positiveengagementwithregulatorybodiesthroughouttheyear,including proactiveengagementwiththeHongKongInsuranceAuthorityasthe regulator-electfortheinternationalGroup. 2018 Jackson bonus pool In2018,theJacksonbonuspoolwasdeterminedbyJacksonNationalLifeInsuranceCompany’sprofitability,remittancestoGroupand advisorysales.AcrossallthesemeasuresJacksonNationalLifeInsuranceCompanydeliveredstrongperformance,andmoredetailon thatperformanceissetoutonpages26to31.TheCommitteealsoconsideredperformanceinanumberofkeyactivitiesandthedelivery againstcertainnon-financialGrouprequirements.Asaresultofthisassessment,theCommitteedeterminedthatBarryStowe’sshareof thebonuspoolwasUS$4,886,910. 150 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continuedOutcome of bonus assessments OnthebasisofthestrongperformanceoftheGroupanditsbusinessunitsandtheCommittee’sconsiderationofthetotalbonusvalue inlightofitsviewofallrelevantcircumstances,includingtheoverallcontributionoftheexecutive,behavioural,conductandrisk managementconsiderations,theCommitteedeterminedthefollowing2018AIPawards.Fortypercentofallawardsaredeferredinto sharesforthreeyears: Executive Director Role MarkFitzPatrick JohnFoley NicNicandrou ChiefFinancialOfficer ChiefExecutive,M&GPrudential ChiefExecutive,Prudential AnneRichards2 BarryStowe3 JamesTurner4 MikeWells CorporationAsia ChiefExecutive,M&G Chairman&CEO,NABU GroupChiefRiskOfficer GroupChiefExecutive 2018 salary1 £745,000 £781,000 HK$10,710,000 £249,000 US$1,157,000 £521,000 £1,126,000 Maximum 2018 AIP (% of salary) Actual 2018 AIP award (% of maximum opportunity) 2018 bonus award (including cash and deferred elements) 175% 180% 180% 600% 160% 160% 200% 95% 84% 92% 0% 92% 95% 95% £1,241,000 £1,186,000 £1,692,000 £nil £4,935,000 £793,000 £2,133,000 Notes 1 SalarypaidinrespectofservicesasanExecutiveDirector. 2 AnneRichardssteppeddownfromtheBoardon10August2018.HeremploymentwiththeCompanyendedon30November2018.Themaximumbonusopportunityshown representsherannualopportunityasanExecutiveDirector,butnobonuswaspaid. InadditiontotheAIP,BarryStowealsoparticipatesintheJacksonbonuspool. 3 4  JamesTurnerwasappointedtotheBoardon1March2018.TheAIPshownabovewasawardedinrespectofhisserviceasanExecutiveDirector. Remuneration in respect of performance periods ending in 2018 Prudential Long Term Incentive Plan (PLTIP) Target setting Ourlong-termincentiveplanshavestretchingperformanceconditionsthatarealignedtothestrategicprioritiesoftheGroup.In2016, allExecutiveDirectorsweregrantedawardsunderthePLTIP.IndeterminingthetargetstheCommitteehadregardtothestretching natureofthethree-yearBusinessPlanforoperatingprofitsetbytheBoard. Theweightingsofthesemeasuresaredetailedinthetablebelow. Executive Director1 JohnFoley NicNicandrou4 BarryStowe JamesTurner5 MikeWells Weighting of measures Group TSR2 Operating profit (Group or business unit)3 50% 50% 50% 50% 50% 50%(businessunittarget) 50%(Grouptarget) 50%(businessunittarget) 50%(Grouptarget) 50%(Grouptarget) Notes 1 ThistableincludescurrentExecutiveDirectorswith2016PLTIPawards.AnneRichardssteppeddownfromtheBoardon10August2018andher2016PLTIPawardlapsed. 2 GroupTSRismeasuredonarankedbasisoverthreeyearsrelativetopeers. 3 Operatingprofitismeasuredonacumulativebasisoverthreeyears. 4 NicNicandrouwasgrantedthisawardwhenhewasintheroleofChiefFinancialOfficer.TheperformancemeasuresattachedtohisPLTIPawarddidnotchangefollowinghis appointmenttotheroleofChiefExecutive,PrudentialCorporationAsiain2017. 5 JamesTurnerwasgrantedthisawardwhenhewasinhispreviousroleofDirectorofGroupFinance.TheperformancemeasuresattachedtohisPLTIPawarddidnotchangefollowing hisappointmenttotheroleofGroupChiefRiskOfficeron1March2018. UndertheGroupTSRmeasureusedfor2016PLTIPawards,25percentoftheawardvestsforTSRatthemedianofthepeergroup increasingtofullvestingforperformancewithintheupperquartile.TSRismeasuredonalocalcurrencybasissincethishasthebenefit ofsimplicityanddirectnessofcomparison.Thepeergroupforthe2016awardsis: Aegon Allianz Legal&General OldMutual SwissRe Aflac Aviva Manulife PrudentialFinancial ZurichInsuranceGroup AIA AXA MetLife StandardLife AIG Generali MunichRe SunLifeFinancial FollowingthemergerofStandardLifeandAberdeenAssetManagementduringtheperformanceperiod,theCommitteedetermined thatStandardLifewouldberetainedinthepeergroupforthepre-mergerperiodandthecombinedentitywouldbeincludedinthepeer groupfromthedateofthemergerforalloutstandingPLTIPawards.Inaddition,followingthedemergerofQuilterfromOldMutualand OldMutual’sdelistingfromtheFTSEon26June2018,theCommitteedeterminedthatOldMutualberetainedasaTSRpeerwithno adjustmenttoitsperformanceduringtheperiodpriortoitsdemergeranddelisting,andthatOldMutual’sTSRperformancefromthe dateofitsdemergeranddelistingwouldtrackanindexofthepeers(excludingPrudentialplc)foralloutstandingPLTIPawards. www.prudential.co.uk AnnualReport2018 Prudential plc 151 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationPerformance assessment Indecidingtheproportionoftheawardstobereleased,theCommitteeconsideredactualfinancialresultsagainsttheseperformance targets.TheCommitteealsoreviewedunderlyingCompanyperformancetoensurevestinglevelswereappropriate,includingan assessmentofwhetherresultswereachievedwithintheGroup’sandbusinessunits’riskframeworkandappetite.TheDirectors’ remunerationpolicycontainsfurtherdetailsofthedesignofPrudential’slong-termincentiveplans. Prudential’sTSRperformanceduringtheperformanceperiod(1January2016to31December2018)wasrankedatmedianofthepeer group.TheportionoftheawardsrelatedtoTSRthatthereforevestedwas25percent. Undertheoperatingprofitmeasure,25percentofthe2016awardsvestformeetingthethresholdoperatingprofittargetsetatthe startoftheperformanceperiod,increasingtofullvestingforperformanceatorabovethestretchlevel.Thetablebelowillustratesthe cumulativeperformanceachievedover2016to2018comparedtotheGrouptargetssetin2016: Group Operatingprofit 2016-18 cumulative targets Threshold Plan Maximum 2016-18 cumulative achievement Vesting under the operating profit element £10,837m £12,041m £13,245m £13,782m 100% TheCommitteedeterminedthatthecumulativeoperatingprofittargetestablishedforthePLTIPshouldbeexpressedusingexchange ratesconsistentwiththereporteddisclosures.Individualbusinessunitsachievedbetween86percentand100percentvestingunder thiselement. DetailsofbusinessunitoperatingprofittargetshavenotbeendisclosedastheCommitteeconsidersthatthesearecommerciallysensitive anddisclosureoftargetsatsuchagranularlevelwouldputtheCompanyatadisadvantagecomparedtoitscompetitors.TheCommittee willkeepthisdisclosurepolicyunderreviewbasedonwhether,initsview,disclosurewouldcompromisetheCompany’scompetitive position. PLTIP vesting TheCommitteeconsideredareportfromtheGroupChiefRiskOfficerwhichhadbeenapprovedbytheGroupRiskCommittee. ThisreportconfirmedthatthefinancialresultswereachievedwithintheGroup’sandbusinessunits’riskframeworkandappetite. Onthebasisofthisreport,andtheperformanceoftheGroupanditsbusinessunitsdescribedabove,theCommitteedecidednotto applyadiscretionaryadjustmenttothearithmeticvestingoutcomeunderthe2016PLTIPawardsanddeterminedthevestingofeach ExecutiveDirector’sPLTIPawardsassetoutbelow. Executive Director JohnFoley NicNicandrou BarryStowe JamesTurner MikeWells Maximum value of award at full vesting1 £2,418,213 £2,292,486 £4,417,184 £554,771 £5,576,826 Percentage of the LTIP award vesting Number of shares/ADRs vesting2 Value of shares/ADRs vesting1 62.5% 62.5% 62.5% 62.5% 62.5% 98,525 93,402 93,530 22,602 227,217 £1,511,374 £1,432,787 £2,760,648 £346,715 £3,485,509 Notes 1 ThesharepriceusedtocalculatethevalueofthePLTIPawardswithperformanceperiodswhichendedon31December2018andvestin2019wastheaverageshare/ADRpricefor thethreemonthsupto31December2018,being£15.34/US$39.41. 2 Thenumberofshares/ADRsvestingincludesaccrueddividends. 152 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continuedLong-term incentives awarded in 2018 2018 share-based long-term incentive awards AsdetailedintheDirectors’remunerationpolicy,approvedbyshareholdersatthe2017AGM,alllong-termincentiveawardsmade toExecutiveDirectorsin2018weregrantedunderthePLTIP.Thevestingoftheseawardswilldependon: — RelativeTSR(25percentofaward); — Grouporbusinessunitoperatingprofit(50percentofaward);and — Balancedscorecardofstrategicmeasures(25percentofaward). InlinewiththeremunerationrequirementsofSolvencyII,theweightingsoftheGroupChiefRiskOfficer’sLTIPperformancetargets weredifferenttotheotherExecutiveDirectorsandwere: — RelativeTSR(50percentofaward); — Groupoperatingprofit(20percentofaward);and — Balancedscorecardofstrategicmeasures(30percentofaward). UndertheGroupTSRmeasureusedfor2018awards,25percentoftheawardvestsforTSRatthemedianofthepeergroup,increasing tofullvestingforperformancewithintheupperquartile.Thepeergroupforthe2018awardsisthesameasthatusedforthe2017awards otherthanfollowingthemergerofStandardLifeandAberdeenAssetManagement,thecombinedentityofStandardLifeAberdeenhas beenincluded.TSRismeasuredonalocalcurrencybasissincethishasthebenefitofsimplicityanddirectnessofcomparison. Thepeergroupforthe2018awardsissetoutbelow: Aegon Aviva Manulife StandardLifeAberdeen AIA AXA MetLife SunLifeFinancial AIG Generali OldMutual ZurichInsuranceGroup Allianz Legal&General PrudentialFinancial Undertheoperatingprofitmeasureusedfor2018awards,25percentoftheawardvestsformeetingthethresholdoperatingprofit, setatthestartoftheperformanceperiod,increasingtofullvestingforperformanceatorabovethestretchlevel. Underthebalancedscorecard,performanceisassessedforeachofthefourmeasures,attheendofthethree-yearperformanceperiod. Performancewillbeassessedonaslidingscaleratherthanthemeet/failapproachadoptedforthe2017scorecard.Eachofthemeasures hasequalweightingandthe2018measuresaresetoutbelow: Capital measure: Cumulativethree-yearECapGroupoperatingcapitalgenerationrelativetoplan,lesscostofcapital(based onthecapitalpositionatthestartoftheperformanceperiod). Vesting basis: 25percentvestingforachievingPlan,increasingtofullvestingforperformanceabovestretchlevel.Theplan figureforthismetricwillbepublishedintheAnnualReportforthefinalyearoftheperformanceperiod. Capital measure: Cumulativethree-yearSolvencyIIGroupoperatingcapitalgeneration(ascapturedinpublisheddisclosures) relativetoplan. Vesting basis: 25percentvestingforachievingPlan,increasingtofullvestingforperformanceabovestretchlevel.Theplan figureforthismetricwillbepublishedintheAnnualReportforthefinalyearoftheperformanceperiod. Conduct measure: Throughappropriatemanagementaction,ensuretherearenosignificantconduct/culture/governanceissues thatresultinsignificantcapitaladd-onsormaterialfines. Vesting basis: 25percentvestingforpartialachievementoftheGroup’sexpectations,increasingtofullvestingforachieving theGroup’sexpectations. Diversity measure: PercentageoftheLeadershipTeamthatisfemaleattheendof2020.Thetargetforthismetricisbasedon progresstowardsthegoalthattheCompanysetwhenitsignedtheWomeninFinanceCharter,specificallythat 30percentofourLeadershipTeamwillbefemalebytheendof2021.Forthisportionofthe2018PLTIPawards tovest,atleast28percentofourLeadershipTeammustbefemalebytheendof2020. Vesting basis: 25percentvestingformeetingthethresholdofatleast27percentofourLeadershipTeambeingfemaleatthe endof2020,increasingtofullvestingforreachingthestretchlevelofatleast29percentbeingfemaleatthatdate. TheperformanceconditionsattachedtooutstandingPLTIPawardsmaybereviewedatthetimeofthedemerger.Shouldany performanceconditionsberevised,thenewconditionswillbenomoreorlessstretchingthatthoseoriginallyattachedtotheawards andthechangeswillbedisclosed. www.prudential.co.uk AnnualReport2018 Prudential plc 153 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationThetablebelowshowstheawardsmadetoExecutiveDirectorsin2018undershare-basedlong-termincentiveplansandthe performanceconditionsattachedtotheseawards: Number of shares or ADRs subject to award* Percentage of awards released for achieving threshold targets‡ Face value of award† Executive Director Role MarkFitzPatrick ChiefFinancial Officer 106,611 £1,862,494 25% JohnFoley ChiefExecutive, M&GPrudential 111,763 £1,952,500 25% NicNicandrou ChiefExecutive, Prudential Corporation Asia 138,846 £2,425,640 25% AnneRichards1 ChiefExecutive, M&G 105,094 £1,835,992 25% BarryStowe Chairman& CEO,NABU 107,649 US$5,322,167 25% JamesTurner GroupChiefRisk Officer 89,439 £1,562,499 25% MikeWells GroupChief Executive 257,813 £4,503,993 25% Weighting of performance conditions Operating profit Group TSR Balanced scorecard Group Asia US UK M&G 25% 25% 50% 25% 25% 31% 19% 25% 25% 50% 25% 25% 50% 25% 25% 50% 50% 30% 20% 25% 25% 50% End of performance period 31December 2020 31December 2020 31December 2020 31December 2020 31December 2020 31December 2020 31December 2020 *AwardsovershareswereawardedtoallExecutiveDirectorsotherthanBarryStowewhoseawardswereoverADRs. †AwardsforExecutiveDirectorsarecalculatedbasedontheaveragesharepriceoverthethreedealingdayspriortothegrantdate,being£17.47forallExecutiveDirectorsotherthan BarryStoweandanADRpriceofUS$49.44forBarryStowe. ‡Thepercentageofawardsreleasedforachievingmaximumtargetsis100percent. Note 1 AnneRichardssteppeddownfromtheBoardon10August2018.Thisawardlapsedattheendofheremploymenton30November2018. Update on performance against targets for awards made in 2017 and 2018 under the Prudential Long Term Incentive Plan TSR Performance Asat31December2018,Prudential’sTSRperformanceduringtheperiod1January2017to31December2018wasrankedbetween medianandupperquartileandduringtheperiod1January2018to31December2018wasrankedbelowmedian. Group operating profit Prudential’sGroupoperatingprofitperformancebetween1January2017and31December2018wasslightlyabovethestretchtarget establishedfor2017PLTIPawards.TheGroup’soperatingprofitachievementbetween1January2018and31December2018was slightlyabovethestretchtargetadoptedfor2018PLTIPawards. Balanced scorecard of strategic measures Between1January2017and31December2018,theGroupalsomadegoodprogresstowardsmeetingthemeasuresunderthe sustainabilityscorecardusedforthe2017and2018PLTIPawards: — Capital measure – Solvency II operating capital generationTheGroup’sSolvencyIIoperatingcapitalgenerationbetween 1January2017to31December2018wasabovethePlanlevelestablishedfor2017PLTIPawards.TheGroup’sSolvencyIIoperating capitalgenerationbetween1January2018and31December2018wasabovethePlanlevelestablishedfor2018PLTIPawards. — Capital measure – E-cap operating capital generationTheGroup’sE-capoperatingcapitalgenerationbetween1January2017 and31December2017wasbelowthePlanlevelestablishedfor2017PLTIPawards. — Conduct measureDuring2017and2018,therewerenosignificantconduct/culture/governanceissuesthatresultedinsignificant capitaladd-onsormaterialfines. — Diversity measureAsat31December2018,29percentofourLeadershipTeamwasfemale.Thisrepresentedstrongprogress towardsthetargetthatatleast27percentoftheLeadershipTeambefemalebytheendof2019forthe2017PLTIPaward,andthe targetthat28percentoftheLeadershipTeambefemalebytheendof2020forthe2018PLTIPaward. 154 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continuedPay comparisons Performance graph and table ThechartbelowillustratestheTSRperformanceofPrudential,theFTSE100(astheCompanyhasapremiumlistingontheLondonStock Exchange)andthepeergroupofinternationalinsurersusedtobenchmarktheCompany’sperformanceforthepurposesofthePLTIP. Prudential TSR vs FTSE 100 and peer group average – total return per cent over 10 years to December 2018 £800 £700 £600 £500 £400 £300 £200 £100 £605 £250 £240 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019  Prudential  FTSE100  Peergroupaverage Note ThepeergroupaveragerepresentstheaverageTSRperformanceofthepeergroupusedfor2018PLTIPawards(excludingcompaniesnotlistedatthestartoftheperiod). TheinformationinthetablebelowshowsthetotalremunerationfortheGroupChiefExecutiveoverthesameperiod: £000 2009 2009 2010 2011 2012 2013 2014 2015 2015 2016 2017 2018 GroupChief Executive Salary,pension andbenefits Annualbonus payment (As%ofmaximum) LTIPvesting (As%ofmaximum) Otherpayments GroupChief Executive ‘singlefigure’ oftotal remuneration3 MTucker1 TThiam TThiam TThiam TThiam TThiam TThiam TThiam2 MWells MWells MWells MWells 1,013 286 1,189 1,241 1,373 1,411 1,458 613 1,992 2,244 1,872 1,815 841 (92%) 1,575 (100%) 308 354 (90%) – – – 1,570 (97%) 2,534 (100%) – 1,570 (97%) 2,528 (100%) – 2,000 (100%) 6,160 (100%) – 2,056 (99.8%) 5,235 (100%) – 2,122 (100%) 9,838 (100%) – 704 (77.3%) 3,382 (100%) – 1,244 (99.7%) 4,290 (100%) – 2,151 (99.5%) 2,975 (70.8%) – 2,072 (94%) 4,616 (95.8%) – 2,133 (95%) 3,486 (62.5%) – 3,737 640 5,293 5,339 9,533 8,702 13,418 4,699 7,526 7,370 8,560 7,434 Notes 1 MarkTuckerlefttheCompanyon30September2009.TidjaneThiambecameGroupChiefExecutiveon1October2009.ThefiguresshownforTidjaneThiam’sremunerationin2009 relateonlytohisserviceasGroupChiefExecutive. 2 TidjaneThiamlefttheCompanyon31May2015.MikeWellsbecameGroupChiefExecutiveon1June2015.ThefiguresshownforMikeWells’sremunerationin2015relateonlytohis serviceasGroupChiefExecutive. 3 Furtherdetailonthe‘singlefigure’isprovidedinthe‘singlefigure’tablefortherelevantyear. www.prudential.co.uk AnnualReport2018 Prudential plc 155 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationPercentage change in remuneration ThetablebelowsetsouthowthechangeinremunerationfortheGroupChiefExecutivebetween2017and2018comparedtoawider employeecomparatorgroup: GroupChiefExecutive AllUKemployees Salary 2% 3% Benefits (17.4)% (1.4)% Bonus 2.9% 8.6% TheemployeecomparatorgroupusedforthepurposeofthisanalysisisallUKemployees.ThisincludesemployeesinM&GPrudential andGroupHeadOffice,andreflectstheaveragechangeinpayforemployeesemployedinboth2017and2018.Thesalaryincrease includesupliftsmadethroughtheannualsalaryreview,aswellasanyadditionalchangesintheyear;forexampletoreflectpromotions orrolechanges.TheUKworkforcehasbeenchosenasthemostappropriatecomparatorgroupasitreflectstheeconomicenvironment wheretheGroupChiefExecutiveisemployed. Group Chief Executive pay compared with employee pay Tofurtherincreasetransparencyofexecutiveremunerationanditsalignmentwiththepayofotheremployees,wearepublishingour CEOpayratiooneyearinadvanceofthedisclosurebecomingarequirementundertheUKCompanies(MiscellaneousReporting) Regulations2018.TheemployeecomparatorgroupusedforthepurposeofthisanalysisisallUKemployees.Thisincludesemployees inM&GPrudentialandGroupHeadOfficein2018.ThetablebelowcomparestheGroupChiefExecutive’s‘singlefigure’oftotal remunerationtothatreceivedbythreerepresentativeUKemployeesin2018. Year 2018 Method OptionB 25th percentile pay ratio 155:1 Median pay ratio 102:1 75th percentile pay ratio 68:1 Undertheregulationsthereisachoiceofthreemethodstodeterminethe25th,medianand75thfull-timeequivalentremunerationofour UKemployees.TheCompanyhaschosentousethe2018hourlyrategenderpaygapinformationasthismethodusesdatathatisaligned withotherdisclosuresmadeunderourgenderpaygapreporting(‘OptionB’inthetableabove).Theemployeesusedinthecalculations wereselectedon11January2019,followingtheendofthefinancialyear.TheCommitteedeterminedthattheidentifiedemployeesare reasonablyrepresentativesincethestructureoftheirremunerationarrangementsisinlinewiththatofthemajorityofUKworkforce. Thesamemethodologyusedforcalculatingthe‘singlefigure’fortheGroupChiefExecutivehasbeenusedforcalculatingthepayand benefitsoftheUKemployees. Thesalaryandtotalremunerationreceivedduring2018bytheindicativeemployeesusedintheaboveanalysisaresetoutbelow: Year 2018salary Total2018remuneration 25th percentile Median 75th percentile £40,000 £48,000 £55,000 £73,000 £68,000 £109,000 TheCommitteebelievesthemedianpayratioisconsistentwiththepay,rewardandprogressionpoliciesforourUKemployees.Thebase salaryandtotalremunerationlevelsfortheGroupChiefExecutiveandthemedianrepresentativeemployeearecompetitivelypositioned withintherelevantmarketsandreflecttheoperationofourremunerationstructureswhichareeffectiveinappropriatelyincentivising staff,havingregardtoourriskframework,riskappetitesandtorewardingthe‘how’aswellasthe‘what’ofperformance. Gender pay gap TheUKbusinessentitieshaverecentlyreportedtheir2018UKgenderpaygapdataanddetailscanbefoundontheGroup’swebsite atwww.prudential.co.uk/responsibility.Therehasbeennarrowingofthepaygapsinsomeareasandmodestincreasesinothers.While wehavemadeprogress,thegenderpaygapcannotberemovedovernight.Weremainfocusedandcommittedtoclosingitasquicklyas possible.Wehaveapolicyandcarryoutprocedurestoensurethat,wheremenandwomenperformsimilarroles,theyarepaidequally. However,thegenderpaygapsdemonstratethedemographicprofileofthebusiness(andthefinancialservicessectormorewidely): thereisagreaterproportionofmalesinmoreseniorandfront-officerolesandagreaterproportionoffemalesinmorejunior,supportand back-officenon-financeroles.AlltheGroup’sbusinessesarecontinuingtoworkoninitiativestoincreasetheproportionofwomenin seniormanagementandoperatingrolesaspartoftheGroup’sstrategicfocusondiversityandinclusionasdescribedinthediversityand inclusionstatementonourwebsite.ThisimportantpriorityisreflectedintheGroup’srewardstructurethroughthediversitymeasure attachedtoPLTIPawardsgrantedfrom2017onwards. Relative importance of spend on pay Thetablebelowsetsouttheamountspayableinrespectof2017and2018onallemployeepayanddividends: Allemployeepay(£m)1 Dividends(£m) Note 1 AllemployeepayastakenfromnoteB2.1tothefinancialstatements. 2017 1,985 1,216 2018 1,838 1,279 Percentage change (7.4)% 5.2% 156 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continuedChairman and Non-executive Director remuneration in 2018 Chairman’s fees TheChairman’sfeewasreviewedbytheCommitteeduring2018andincreasedby2.2percentto£750,000witheffectfrom1July2018 inordertoreflectinflation. Non-executive Directors’ fees TheNon-executiveDirectors’feeswerereviewedbytheBoardduring2018andthemembershipfeefortheAudit,Remunerationand RiskCommitteeswasincreasedfrom£27,500to£30,000whiletheNomination&GovernanceCommitteememberfeeincreasedfrom £10,000to£12,500.Thisisthefirsttimethesefeeshavebeenincreasedsince2015.Nootherfeeswereincreased. Annual fees Basicfee Additionalfees: AuditCommitteeChair AuditCommitteemember RemunerationCommitteeChair RemunerationCommitteemember RiskCommitteeChair RiskCommitteemember NominationCommitteemember SeniorIndependentDirector From 1 July 2017  £ From 1 July 2018  £ 97,000 97,000 75,000 27,500 60,000 27,500 75,000 27,500 10,000 50,000 75,000 30,000 60,000 30,000 75,000 30,000 12,500 50,000 Note If,inaparticularyear,thenumberofmeetingsismateriallygreaterthanusual,theCompanymaydeterminethattheprovisionofadditionalfeesisfairandreasonable. TheresultingfeespaidtotheChairmanandNon-executiveDirectorsare: £000s Chairman PaulManduca Non-executive Directors HowardDavies AnnGodbehere1 DavidLaw KaiNargolwala2 AnthonyNightingale PhilipRemnant3 AliceSchroeder4 LordTurner ThomasWatjen5 FieldsWicker-Miurin6 Total 2018 fees 2017 fees 2018 taxable benefits* 2017 taxable benefits* Total 2018 remuneration: the ‘single figure’† Total 2017 remuneration: the ‘single figure’† 742 212 – 212 155 168 216 150 155 131 41 727 209 79 176 151 166 211 124 140 59 – 136 122 – – – – – – – – – – – – – – – – – – – – 878 212 – 212 155 168 216 150 155 131 41 849 209 79 176 151 166 211 124 140 59 – 2,182 2,042 136 122 2,318 2,164 *Benefitsincludethecostofprovidingtheuseofacaranddriver,medicalinsuranceandsecurityarrangements. †Eachremunerationelementisroundedtothenearest£1,000andtotalsarethesumoftheseroundedfigures.Totalremunerationiscalculatedusingthemethodologyprescribed bySchedule8oftheCompaniesAct.TheChairmanandNon-executiveDirectorsarenotentitledtoparticipateinannualbonusplansorlong-termincentiveplans. Notes 1 AnnGodbeheresteppeddownfromtheBoardon18May2017. 2 KaiNargolwalaalsoreceivedanannualfeeof£250,000inrespectofhisnon-executivechairmanshipofPrudentialCorporationAsiaLimitedwitheffectfrom1February2016. 3 PhilipRemnantsteppeddownfromhisnon-executivechairmanshipofM&GGroupLimitedwitheffectfrom1October2018.Hereceivedafeeof£187,500inrespectofhis chairmanshipduring2018. 4 AliceSchroederbecameamemberoftheRiskCommitteeon1March2018. 5 ThomasWatjenjoinedtheBoardon11July2017andbecameamemberoftheRiskCommitteeon1November2018. 6 FieldsWicker-MiurinjoinedtheBoardandtheRemunerationCommitteeon3September2018. www.prudential.co.uk AnnualReport2018 Prudential plc 157 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationStatement of Directors’ shareholdings TheinterestsofDirectorsinordinarysharesoftheCompanyaresetoutbelow.‘Beneficialinterest’includessharesownedoutright, sharesacquiredundertheShareIncentivePlan(SIP)anddeferredannualincentiveawards,detailedinthe‘Supplementaryinformation’ section.Itisonlythesesharesthatcounttowardstheshareownershipguidelines. 1 January 2018 (or on date of appointment) Total beneficial interest  (numberof  shares) During 2018 31 December 2018 (or on date of retirement) Share ownership guidelines Number of shares acquired Number of shares disposed Total beneficial interest*  (numberof  shares) Number of shares subject to performance conditions† Total interest in shares Beneficial interest as a percentage of basic salary/ basic fees§ Share ownership guidelines‡  (%of  salary/fee) Chairman PaulManduca Executive Directors MarkFitzPatrick JohnFoley NicNicandrou AnneRichards1 BarryStowe2 JamesTurner3 MikeWells4 Non-executive Directors HowardDavies DavidLaw KaiNargolwala AnthonyNightingale PhilipRemnant AliceSchroeder5 LordTurner ThomasWatjen6 FieldsWicker-Miurin7 42,500 – – 42,500 – 42,500 81 250,116 292,309 86,361 282,346 9,701 662,623 9,278 9,066 70,000 50,000 6,916 8,500 6,552 5,500 – 28,252 161,186 142,276 56,447 285,042 23,798 304,853 – 81,468 139,500 – 193,860 12,623 155,224 236 – – – – 6,000 167 4,840 1,000 – – – – – – – – – 28,333 329,834 295,085 142,808 373,528 20,876 812,252 9,514 9,066 70,000 50,000 6,916 14,500 6,719 10,340 1,000 207,971 370,280 384,039 258,461 737,088 150,495 854,084 236,304 700,114 679,124 401,269 1,110,616 171,371 1,666,336 – – – – – – – – – 9,514 9,066 70,000 50,000 6,916 14,500 6,719 10,340 1,000 100% 250% 250% 250% N/A 250% 250% 400% 100% 100% 100% 100% 100% 100% 100% 100% 100% 94%  62% 693% 473% N/A 708% 55% 1184%  161% 153% 1185% 846% 117% 245% 114% 175% 17% *TherewerenochangesofDirectors’interestsinordinarysharesbetween31December2018and12March2019,withtheexceptionoftheUK-basedExecutiveDirectorsduetotheir participationinthemonthlyShareIncentivePlan(SIP).MarkFitzPatrickacquiredafurther37sharesintheSIP,JohnFoleyacquiredafurther38sharesintheSIP,JamesTurneracquired afurther38sharesintheSIPandMikeWellsacquiredafurther38sharesintheSIPduringthisperiod. †Furtherinformationonshareawardssubjecttoperformanceconditionsaredetailedinthe‘share-basedlong-termincentiveawards’sectionoftheSupplementaryinformation. ‡HoldingrequirementoftheArticlesofAssociation(2,500ordinaryshares)mustbeobtainedwithinoneyearofappointmenttotheBoard.TheincreasedguidelinesforExecutive DirectorswereintroducedwitheffectfromJanuary2013andincreasedagainin2017.ExecutiveDirectorshavefiveyearsfromthisdate(ordateofjoiningorrolechange,iflater)toreach theenhancedguideline.TheguidelineforNon-executiveDirectorswasintroducedon1July2011.Non-executiveDirectorshavethreeyearsfromtheirdateofjoiningtoreachtheguideline. §Basedontheaverageclosingpriceforthesixmonthsto31December2018(£16.42). TheCompanyanditsDirectors,ChiefExecutivesandshareholdershavebeengrantedapartialexemptionfromthedisclosurerequirementsunderPartXVoftheSecuritiesandFutures Ordinance(SFO).Asaresultofthisexemption,Directors,ChiefExecutivesandshareholdersdonothaveanobligationundertheSFOtonotifytheCompanyofshareholdinginterests, andtheCompanyisnotrequiredtomaintainaregisterofDirectors’andChiefExecutives’interestsundersection352oftheSFO,noraregisterofinterestsofsubstantialshareholders undersection336oftheSFO.TheCompanyis,however,requiredtofilewiththeStockExchangeofHongKongLimitedanydisclosureofinterestsnotifiedtoitintheUnitedKingdom. Notes 1 AnneRichardssteppeddownfromtheBoardon10August2018.Totalinterestinsharesisshownasatthisdate. 2 BarryStowesteppeddownfromtheBoardon31December2018.Totalinterestinsharesisshownatthisdate.Forthe1January2018figureBarryStowe’sbeneficialinterestinshares ismadeupof141,173ADRs(representing282,346ordinaryshares),(8,513.73oftheseADRsareheldwithinaninvestmentaccountwhichsecurespremiumfinancingforalife assurancepolicy).Forthe31December2018figurethebeneficialinterestinsharesismadeupof186,764ADRs(representing373,528ordinaryshares). 3 JamesTurnerwasappointedtotheBoardon1March2018.Totalinterestinsharesisshownasatthisdate. 4 Forthe1January2018figureMikeWells’sbeneficialinterestinsharesismadeupof249,811ADRs(representing499,622ordinaryshares)and163,001ordinaryshares.Forthe 31December2018figurehisbeneficialinterestinsharesismadeupof297,320ADRs(representing594,640ordinaryshares)and217,612ordinaryshares. 5 Forthe1January2018figureAliceSchroeder’sbeneficialinterestinsharesismadeupof4,250ADRs(representing8,500ordinaryshares).Forthe31December2018figurethe beneficialinterestinsharesismadeupof7,250ADRs(representing14,500ordinaryshares). 6 Forthe1January2018figureThomasWatjen’sbeneficialinterestinsharesismadeupof2,750ADRs(representing5,500ordinaryshares).Forthe31December2018figurethe beneficialinterestinsharesismadeupof5,170ADRs(representing10,340ordinaryshares). 7 FieldsWicker-MiurinwasappointedtotheBoardon3September2018.Totalinterestinsharesisshownfromthisdate. 158 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continued ThebarchartbelowillustratestheExecutiveDirectors’shareholdingasapercentageofbasesalaryversustheshareownershipguideline. % 1,200 1,000 800 600 400 1,184 693 708 473 400 200 250 250 250 250 250 0 62 Mark FitzPatrick  Shareownershipguidelineas%ofsalary  Beneficialinterestasat31December2018,as%ofsalary John Foley Nic Nicandrou James Turner Barry Stowe Mike Wells 55 Outstanding share options ThefollowingtablesetsouttheshareoptionsheldbytheExecutiveDirectorsintheUKSavings-RelatedShareOptionScheme(SAYE) asattheendoftheperiod. Date of grant Exercise price  (pence) 21Sep17 21Sep16 21Sep17 23Sep14 21Sep16 21Sep16 22Sep15 1,455 1,104 1,455 1,155 1,104 1,104 1,111 MarkFitzPatrick JohnFoley JohnFoley NicNicandrou NicNicandrou AnneRichards MikeWells Market price at 31 Dec 2018  (pence) Exercise period Number of options Beginning Beginning of period Granted Exercised Cancelled Forfeited End Lapsed End of period 1,402 01Dec22 31May23 1,402 01Dec19 31May20 1,402 01Dec20 31May21 1,402 01Dec19 31May20 1,402 01Dec21 31May22 1,402 01Dec19 31May20 1,402 01Dec18 31May19 2,061 815 618 1,311 1,358 1,630 1,620 – – – – – – – – – – – – – 1,620 – – – – – – – – – – – – – – – – – – – – – 2,061 815 618 1,311 1,358 1,630 – Notes 1 NogainwasmadebyDirectorsin2018ontheexerciseofSAYEoptions. 2 Nopricewaspaidfortheawardofanyoption. 3 Thehighestandlowestclosingsharepricesduring2018were£19.81and£13.44respectively. 4 Allexercisepricesareshowntothenearestpence. 5 AnneRichardsparticipatedintheplanduringhertimeasanExecutiveDirector.Thecolumnabovemarked’Endofperiod’reflectsAnneRichards’positionasat10August2018, thedateatwhichshesteppeddownfromtheBoard. 6 FollowingNicNicandrou’sappointmentasChiefExecutiveofPrudentialCorporationAsiaon17July2017,hewasabletocontinuesavingunderhisSAYEoptioncontractsexisting atthatdatebutisnolongereligibletoparticipateinfutureSAYEgrants. www.prudential.co.uk AnnualReport2018 Prudential plc 159 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationDirectors’ terms of employment and external appointments DetailsoftheservicecontractsofeachExecutiveDirectorareoutlinedinthetablebelow.TheDirectors’remunerationpolicycontains furtherdetailsofthetermsincludedinExecutiveDirectorservicecontracts. SubjecttotheGroupChiefExecutive’sortheChairman’sapproval,ExecutiveDirectorsareabletoacceptexternalappointments asnon-executivedirectorsofotherorganisations.FeespayableareretainedbytheExecutiveDirectors. Service contracts External appointment Date of contract Notice period to the Company Notice period from the Company External appointment during 2018 Fee received in the period the Executive Director was a Group Director 17May2017 8December2010 27April2009 4July2016 18October2006 1March2018 21May2015 12months 12months 12months 12months 12months 12months 12months 12months 12months 12months 12months 12months 12months 12months – – – – – Yes – – – – – – £45,833 – Executive Directors MarkFitzPatrick JohnFoley NicNicandrou AnneRichards BarryStowe JamesTurner MikeWells Directorsservedontheboardsofeducational,charitableandculturalorganisationswithoutreceivingafeefortheseservices. DetailsofchangestotheBoardofDirectorsduringtheyeararesetoutintheCorporategovernancereport. Letters of appointment of the Chairman and Non-executive Directors DetailsofNon-executiveDirectors’individualappointmentsareoutlinedbelow.TheDirectors’remunerationpolicycontainsfurther detailsontheirlettersofappointment. Chairman/Non-executive Director Chairman PaulManduca Non-executive Directors PhilipRemnant HowardDavies DavidLaw KaiNargolwala AnthonyNightingale AliceSchroeder LordTurner ThomasWatjen FieldsWicker-Miurin Appointment by the Board Notice period Time on the Board at 2019 AGM 15October2010 (ChairmanfromJuly2012) 12months 8years7months 1January2013 15October2010 15September2015 1January2012 1June2013 10June2013 15September2015 11July2017 3September2018 6years4months 6months 8years7months 6months 3years8months 6months 6months 7years4months 6months 5years11months 6months 5years11months 6months 3years8months 6months 1years10months 8months 6months 160 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continuedRecruitment arrangements InmakingdecisionsabouttheremunerationarrangementsforthosejoiningtheBoard,theCommitteeworkedwithintheDirectors’ remunerationpolicyapprovedbyshareholdersandwasmindfulof: — Theskills,knowledgeandexperiencethateachnewExecutiveDirectorbroughttotheBoard; — Theneedtosupporttherelocationofexecutivestoenablethemtoassumetheirroles;and — Itscommitmenttohonourlegacyarrangements. Appointinghigh-calibreexecutivestotheBoardandtodifferentrolesontheBoardisnecessarytoensuretheCompanyiswellpositioned todevelopandimplementitsstrategyanddeliverlong-termvalue.AstheCompanyoperatesinaninternationalmarketplacefortalent, thebestinternalandexternalcandidatesaresometimesaskedtomovelocationtoassumetheirnewroles.Wherethishappens,the Companywillofferrelocationsupport.Thesupportofferedwilldependonthecircumstancesofeachmovebutmayincludepayingfor travel,shippingservices,theprovisionoftemporaryaccommodationandotherhousingbenefits.Executivesmayreceivesupportwith thepreparationoftaxreturns,butnocurrentExecutiveDirectoristaxequalised. James Turner JamesTurnerwasappointedasGroupChiefRiskOfficeron1March2018.MrTurnerwasappointedonalowersalarythanhis predecessorandhasthesameincentiveopportunities,namelyamaximumbonusopportunityof160percentofsalaryundertheAIP andalong-termincentiveawardof250percentofsalary.MrTurner’sbonuswillbesubjectto40percentdeferralforthreeyearsand thedeferredbonuswillbepaidinPrudentialplcshares.Hislong-termincentiveawardswillbesubjecttoatwo-yearholdingperiodat theendofthethree-yearperformanceperiod.MrTurnerwillbesubjecttothesameshareholdingguidelinesof250percentofsalary asallotherExecutiveDirectors.Hewillhavefiveyearsfromthedateofhisappointmenttobuildthislevelofownership.Therehasbeen nobuy-outasMrTurnerwasinternallypromotedtothisroleandnorelocationwaspaidonhimjoiningtheBoard.MrTurner’sservice contractcontainsanoticeprovisionunderwhicheitherpartymayterminateupon12months’notice. Detailsoftheremunerationhereceivedduring2018inhisroleasGroupChiefRiskOfficeraresetoutinthe2018‘singlefigure’table. Michael Falcon MichaelFalconsucceededBarryStoweasChairmanandChiefExecutiveOfficer,JacksonHoldingsLLCandjoinedtheBoardon 7January2019.AssetoutintheStatementofimplementationin2019,MrFalconwasappointedonalowersalarythanhispredecessor withlowerincentiveopportunities.MrFalcon’sbasicsalaryisUS$800,000perannum.For2019hewillhaveamaximumbonus opportunityof100percentofsalaryundertheAIP.Hewillalsobeeligibletoreceivea10percentshareoftheJacksonbonuspool. FortypercentofanybonuswillbedeferredintotheCompany’sADRsforthreeyears.Long-termincentiveawards,grantedunderthe PLTIP,willhaveafacevalueongrantof400percentofbasesalary.Hewillbesubjecttothesameshareholdingguidelinesof250percent ofsalaryasallotherExecutiveDirectorsandwillhavefiveyearsfromthedateofhisappointmenttobuildthislevelofownership. Buy-out awards InordertofacilitateMrFalcon’sappointment,theCompanyagreedtoreplacethe2018bonusandotheroutstandingawardsthat MrFalconforfeitedonleavinghispreviousemployer,J.P.MorganAssetManagement. 2018 bonus TheCommitteeapprovedanawardundertheAIPofUS$2,637,179inordertocompensateMrFalconforthelossofhis2018bonus. Theamountistheaverageofthe2016and2017bonusesMrFalconreceivedfromJ.P.MorganAssetManagement.Inlinewiththe Directors’remunerationpolicy,60percentofthiswillbedeliveredincashand40percentdeferredintoPrudentialADRswithdividend equivalentsuntilthethirdanniversaryofthegrant’sawarddate,subjecttotherulesofthedeferredAIP.ThisbonuspaymentandAIP awardwillbemadealongside2018bonuspaymentsanddeferredAIPawardsforotherExecutiveDirectors. Outstanding deferred awards ThetermsofMrFalcon’sreplacementawardsweredesignedtoreplicatethoseofhisforfeitedrestrictedstockandfundunits.Atthe dateofthisreporttheCompanyisinaClosedPeriodandtheseawardswillnotbegranteduntilweareinanOpenPeriodfollowing theannouncementof2018results. AportionoftheseawardsthatwereduetovestinJanuary2019willbecompensatedbyacashpaymentofUS$1,316,551tobepaid inMarch2019afterthedateofthisreport.Thedateofthispaymentwillbereportedinthe2019Directors’remunerationreport. www.prudential.co.uk AnnualReport2018 Prudential plc 161 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationTheremainingawardswillbemadeintheformofnominalcostoptionsoverPrudentialADRs,tobereleasedinaccordancewiththe originalvestingschedule.Thetermsofthereplacementawardweredesignedtoreplicatethoseoftheforfeitedawardsandwilltherefore notbesubjecttoperformanceconditionsandwillaccruedividendequivalents.ThisawardentitlesMrFalcontoreceiveacashamount equaltothemarketvalueofthespecificnotionalnumberofPrudentialADRsonthedateofexercise,lessanawardpriceof10penceper ADR.Theawardwillvestonthedatesdetailedbelow.ThenumberofPrudentialADRsoverwhichoptionswillbegrantedhasbeen calculatedwithreferencetotheclosingstockpricesofJ.P.MorganAssetManagementandPrudentialplcon19December2018, MrFalcon’slastdateofemploymentwithhisformeremployer.Furtherdetailswillbedisclosedinstockexchangeandwebsite announcementswhenthegranttakesplace. Exercise period 25Octoberto24November2019 30dayscommencingonthedateofreleaseofPrudentialplc’sresultsfor2019 30dayscommencingonthedateofreleaseofPrudentialplc’sresultsfor2020 Number of notional ADRs 11,224 30,938 14,380 Theabovereplacementawardswillbemadeunderrule9.4.2oftheUKLAListingRules,asprovidedforbytheDirectors’remuneration policy,astheawardcouldnotbeeffectedunderanyoftheCompany’sexistingincentiveplans.MrFalconisthesoleparticipantinthis arrangementandnofurtherawardswillbemadetoMrFalconunderthisplan. MrFalconhasnotbeenappointedforafixedtermbuthisservicecontractcontainsanoticeprovisionunderwhicheitherpartymay terminateupon12months’notice. PriortojoiningtheGroup,MrFalconwasbasedinHongKong.TheCompanywillpaytotransportMrFalcon’sbelongingsfromHong KongtotheUSandwillthensupporthismovewithintheUSinlinewithourUSdomesticrelocationpolicy.Thesebenefitswillbe includedinthe2019Directors’remunerationreport. Payments to past Directors and payments for loss of office TheCommittee’sapproachwhenexercisingitsdiscretionunderthepolicyistobemindfuloftheparticularcircumstanceofthedeparture andthecontributiontheindividualmadetotheGroup. Anne Richards AnneRichardssteppeddownfromtheBoardasChiefExecutive,M&Gon10August2018andheremploymentendedwiththe Companyon30November2018.TheCommitteeappliedtheDirectors’remunerationpolicywhendeterminingseparationtermsfor MsRichards. MsRichardsreceived£161,976inrespectofsalary,benefitsandpensionbetween11Augustand30November2018.Shewillnot receiveabonusawardfor2018.AportionofMsRichards’2016and2017bonuseswasdeferredforthreeyearsintheformofshares. ThesedeferredAIPawardswillbereleasedontheoriginaltimetableandremainsubjecttomalusandclawbackprovisions. AllofMsRichards’outstandinglong-termincentiveawardsandbuy-outawards(grantedtoMsRichardswhenshejoinedPrudentialin 2016inrespectoftheawardssheforfeitedonleavingAberdeenAssetManagement)lapsedattheendofheremploymentandshedid notreceivealossofofficepayment. Barry Stowe BarryStoweretiredasChairmanandChiefExecutiveOfficer,NABUon31December2018.HewillremainasanadvisertotheGroup untilhisemploymentendson31December2019.MrStowe’sbasesalary,pensionbenefitsandcertainotherbenefitswillcontinuetobe paiduntiltheendofhisemployment. AportionofMrStowe’s2016and2017bonuseswasdeferredforthreeyearsintheformofADRs.MrStowe’sunvestedawardsovera totalof186,764ADRsundertheAIPwillbereleasedontheoriginaltimetable.Theyremainsubjecttomalusandclawbackprovisionsand willcontinuetoaccumulatedividendequivalentsuntiltheyarereleased. MrStowe’soutstandingPLTIPawardswillvestinlinewiththeoriginalvestingdates,subjecttosatisfactionoftheperformanceconditions undertheplanrules.The2017and2018PLTIPawardswillbepro-rateduptothedateonwhichMrStoweretiredfromtheBoard,while the2016awardwillnotbepro-ratedsinceMrStoweservedontheBoardfortheentireperformanceperiod.Theseawards(totalling 253,268ADRs)willcontinuetoaccumulatedividendequivalentsuntiltheyarereleasedandbesubjecttotheoriginalmalusand clawbackprovisions.The2017and2018PLTIPawardswillremainsubjecttoatwo-yearholdingperiodfollowingtheendoftheir three-yearperformanceperiods. AsdiscussedundertheAnnualbonusoutcomesfor2018,MrStowehasreceivedanannualbonusfor2018ofUS$6,588,583. Sixtypercentofthisawardwillbepaidincashintheusualway,and40percentwillbedeferredintoPrudentialADRs(tobereleased inthespringof2022).Thisawardwillbesubjecttomalusandclawbackprovisions. MrStowewillnotreceiveabonusfor2019andhewillnotbemadealong-termincentiveawardin2019oranysubsequentyear. TheCommitteeappliedtheDirectors’remunerationpolicywhendeterminingseparationarrangementsforMsRichardsandMrStowe. 162 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continuedTony Wilkey TonyWilkeysteppeddownfromtheBoardon17July2017andhisemploymentendedwiththeGroupon17July2018.MrWilkey received£1,057,343inrespectofsalary,benefitsandpensionbetween1Januaryand17July2018. Asdisclosedinthe2017Directors’remunerationreport,theCommitteeexerciseditsdiscretioninaccordancewiththeapproved Directors’remunerationpolicyanddeterminedthatMrWilkeyshouldbeallowedtoretainhisunvestedPLTIPawardgrantedin2016. Thisawardwillvestinaccordancewiththeoriginaltimetable,subjecttotheoriginalperformanceconditions,remainsubjecttomalus andclawbackprovisions,andwillbepro-ratedforservice. Assetoutinthesection‘Remunerationinrespectofperformancein2018’theperformanceconditionsattachedtoMrWilkey’s 2016PLTIPawardswerepartiallymetand55.5percentoftheseawardswillbereleasedin2019.ThedetailsofMrWilkey’sawardare setoutbelow. Award PrudentialLTIP Number of shares vesting1 Value of shares vesting2 69,891 £1,072,128 Notes 1 Thenumberofsharesvestingincludeaccrueddividendshares. 2 Thesharepriceusedtocalculatethevaluewastheaveragesharepriceforthethreemonthsupto31December2018,being£15.34. Other Directors AnumberofformerDirectorsreceiveretireemedicalbenefitsforthemselvesandtheirpartner(whereapplicable).Thisisconsistent withotherseniormembersofstaffemployedatthesametime.Ademinimisthresholdof£10,000hasbeensetbytheCommittee; anypaymentsorbenefitsprovidedtoapastDirectorunderthisamountwillnotbereported. Statement of voting at general meeting Atthe2017AnnualGeneralMeeting,shareholderswereaskedtovoteonthecurrentDirectors’remunerationpolicyandatthe 2018AnnualGeneralMeeting,shareholderswereaskedtovoteonthe2017Directors’remunerationreport.Eachoftheseresolutions receivedasignificantvoteinfavourbyshareholdersandtheCommitteeisgratefulforthissupportandendorsementbyour shareholders.Thevotesreceivedwere: Resolution ToapprovetheDirectors’remunerationpolicy Votes for % of votes cast Votes against % of votes cast Total votes cast Votes withheld (2017AGM) 1,773,691,171 90.71 181,582,497 9.29 1,955,273,668 45,820,585 ToapprovetheDirectors’remunerationreport (2018AGM) 1,944,563,586 94.91 104,204,573 5.09 2,048,768,159 26,571,316 Statement of implementation in 2019 Aligning 2019 pay to performance ExecutiveDirectors’remunerationpackageswerereviewedin2018withchangeseffectivefrom1January2019.WhentheCommittee tookthesedecisions,itconsideredthesalaryincreasesawardedtootheremployeesin2018andtheexpectedincreasesin2019. TheexternalmarketreferencepointsusedtoprovidecontexttotheCommitteewereidenticaltothoseusedfor2018salaries. AllExecutiveDirectorsreceivedasalaryincreaseof2percent.The2019salaryincreasebudgetsforotheremployeesacrosstheGroup’s businessunitswerebetween2percentand8percent. TheExecutiveDirectors’bonusopportunities,performancemeasuresandweightingswillremainthesameasin2018. DetailsofMichaelFalcon’srecruitmentarrangementshavebeenprovidedundertheRecruitmentarrangementssection.TheCommittee consideredhisremunerationpackagewithreferencetointernalandexternalreferencepointsanddeterminedthatitwasappropriateto appointhimonalowersalaryandlowerincentiveopportunitiesthanhispredecessor,BarryStowe,whohadservedontheBoardover thelast12years.HavingjoinedtheBoardon7January2019,MichaelFalconwillbeeligibletoreceiveafullyearbonusforthe2019 financialyear.Hewillreceivea2019long-termincentiveaward,grantedunderthePLTIP,withafacevalueongrantof400percent ofbasesalary. On28February2019,weannouncedthatJohnFoley,ChiefExecutiveofM&GPrudential,NicNicandrou,ChiefExecutiveof PrudentialCorporationAsia,andMichaelFalcon,ChairmanandChiefExecutiveOfficer,JacksonHoldingsLLC,willstepdownas membersofPrudential’sBoardattheendoftheAnnualGeneralMeetingon16May2019aspartofourprogresstowardsthedemerger ofM&GPrudential.TheywillremainintheirexecutiverolesandwillcontinuetobemembersoftheGroupExecutiveCommittee. TheremunerationoftheseexecutiveswillbemanagedinlinewiththeapprovedDirectors’remunerationpolicyandtheywillnot receiveanylossofofficepaymentinrespectoftheirserviceasDirectors.Furtherdetailswillbedisclosedinwebsiteannouncements andinthe2019Directors’remunerationreport. www.prudential.co.uk AnnualReport2018 Prudential plc 163 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information2019 share-based long-term incentive awards TheExecutiveDirectors’long-termincentiveawardswillcontinuetobemadeunderthePLTIPandtheopportunitylevelsremainthe sameasthe2018PLTIPawards.However,ashighlightedintheAnnualstatementfromtheChairmanoftheRemunerationCommittee atthebeginningofthisreport,changeswillbemadetothevestingscaleandmeasuresunderPLTIPforthe2019awardsonly.Thevesting oftheseawardswilldependon: — RelativeTSR(75percentofaward);and — Balancedscorecardofstrategicmeasures(25percentofaward). SincethesemeasuresareinlinewiththeremunerationrequirementsofSolvencyII,theweightingsoftheGroupChiefRiskOfficer’s PLTIPperformancetargetswillbethesameasthatoftheotherExecutiveDirectors. UndertheGroupTSRmeasure,20percentoftheawardwillvestforTSRatthemedianofthepeergroup,increasingtofullvestingfor performancewithintheupperquartile.TSRismeasuredonalocalcurrencybasissincethishasthebenefitofsimplicityanddirectness ofcomparison.AcomprehensivereviewoftheTSRpeergrouphasbeenundertakenfor2019PLTIPawardsasanumberofyearshas passedsincethegroupwaslastconsideredindetail.Thecompanieswereselectedbasedonorganisationalsize,productmixand geographicalfootprint. Thepeergroupfor2019PLTIPawardsissetoutbelow: Aegon GreatEastern PingAnInsurance AIA LincolnNational PrincipalFinancial AXAEquitable Manulife PrudentialFinancial ChinaTaipingInsurance MetLife SunLifeFinancial TheTSRpeergroupfor2017and2018PLTIPawardsremainsunchanged. Underthe2019balancedscorecard,performancewillbeassessedforeachofthefourmeasures,attheendofthethree-year performanceperiod.Performancewillbeassessedonaslidingscale.Eachofthemeasureshasequalweightingandthe2019measures aresetoutbelow: Capital measure: Cumulativethree-yearE-capGroupoperatingcapitalgenerationrelativetoplan,lesscostofcapital (basedonthecapitalpositionatthestartoftheperformanceperiod). Vesting basis: 20percentvestingforachievingPlan,increasingtofullvestingforperformanceabovestretchlevel.Theplan figureforthismetricwillbepublishedintheAnnualReportforthefinalyearoftheperformanceperiod. Capital measure: Cumulativethree-yearSolvencyIIGroupoperatingcapitalgeneration(ascapturedinpublisheddisclosures) relativetoplan. Vesting basis: 20percentvestingforachievingPlan,increasingtofullvestingforperformanceabovestretchlevel.Theplan figureforthismetricwillbepublishedintheAnnualReportforthefinalyearoftheperformanceperiod. Conduct measure: Throughappropriatemanagementaction,ensuretherearenosignificantconduct/culture/governanceissues thatresultinsignificantcapitaladd-onsormaterialfines. Vesting basis: 20percentvestingforpartialachievementoftheGroup’sexpectations,increasingtofullvestingforachieving theGroup’sexpectations. Diversity measure: PercentageoftheLeadershipTeamthatisfemaleattheendof2021.Thetargetforthismetricwillbebasedon progresstowardsthegoalthattheCompanysetwhenitsignedtheWomeninFinanceCharter,specificallythat 30percentofourLeadershipTeamwillbefemalebytheendof2021. Vesting basis: 20percentvestsformeetingthethresholdofatleast28percentofourLeadershipTeambeingfemaleattheend of2021,increasingtofullvestingforreachingthestretchlevelofatleast32percentbeingfemaleatthatdate. Pension entitlements from 2019 Externally-recruitedExecutiveDirectorsappointedonorafter1March2019willbeofferedpensionbenefitsof20percentofsalary, ratherthanthecurrentlevelof25percentofsalary.Givenevolvingpracticeinthisarea,pensionbenefitswillbeconsideredagainaspart ofourreviewoftheDirectors’remunerationpolicy. 164 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continuedDemerger and review of the Directors’ remuneration policy During2018theGroupannounceditsintentiontodemergeM&GPrudentialfromPrudentialplc,resultingintwoseparatelylisted companies,eachwithitsowndistinctinvestmentprospects.InpreparationforthedemergerprocesstheCommitteehasestablished asetofprinciplestounderpindecisionsonremunerationrelatingtothedemerger,including: — Executivesshouldnotbeadvantagedordisadvantagedbythedemerger;thevalueofoutstandingawardsandtheirkeyterms (releasedates,holdingperiods,malusandclawbackprovisions)shouldbeunaffected; — Whereperformanceconditionsneedtoberevised,thenewconditionsshouldbenomoreorlessstretchingthatthoseoriginally attachedtotheawards; — WheretheCommitteehasapplieddiscretion,thiswillbedisclosedclearly;and — ThefuturearrangementsofM&GPrudentialwillbeamatterfortheBoard,RemunerationCommitteeandshareholdersofthenew business.However,untilthedateofthedemerger,thePrudentialplcRemunerationCommitteewillhavearesponsibilityforthe remunerationofmembersoftheplcBoardandGroupExecutiveCommitteemembersandoversightofthoseM&GPrudential employeescurrentlywithinitspurview. ThePrudentialplcDirectors’remunerationpolicywillcontinuetoapplytoallmembersoftheplcBoarduntilthedateofthedemergerand thePrudentialplcGroup-wideRemunerationPolicywillcontinuetoapplytoallGroupstaff(includingthosewithintheM&GPrudential business)untilthedateofthedemerger. During2019,weintendtoreviewtheDirectors’remunerationpolicy,takingintoaccountthedemerger,theviewsofourshareholders, thenewUKCorporateGovernanceCode,forthcomingchangestoaccountingstandardsandthebroaderregulatoryandcompetitive environment. Chairman and Non-executive Directors FeesfortheChairmanandNon-executiveDirectorswerereviewedin2018withchangeseffectivefrom1July2018,assetoutunder theChairmanandNon-executiveDirectorremunerationin2018section.Thenextreviewwillbeeffective1July2019. SignedonbehalfoftheBoardofDirectors Anthony Nightingale, CMG SBS JP Chair of the Remuneration Committee 12March2019 Paul Manduca Chairman 12March2019 www.prudential.co.uk AnnualReport2018 Prudential plc 165 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information Supplementary information Directors’ outstanding long-term incentive awards Share-based long-term incentive awards Plan name Year of award Conditional share awards outstanding at 1 Jan 2018 Conditional awards in 2018 Market price at date of award Mark FitzPatrick PLTIP PLTIP John Foley Nic Nicandrou Barry Stowe1 James Turner Mike Wells2 PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP PLTIP 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 2015 2015 2016 2017 2018 2015 2015 2016 2017 2018 2015 2015 2016 2017 2018  (numberof  shares)  (numberof  shares) 101,360 106,611 101,360 106,611 122,808 144,340 114,177 111,763 381,325 111,763 104,117 136,836 108,357 138,846  (pence) 1,828 1,750 1,672 1,279 1,672 1,750 1,672 1,279 1,672 1,750 Dividend equivalents on vested shares3  (number  ofshares  released) Rights exercised in 2018 Rights lapsed in 2018 Conditional share awards outstanding at 31 Dec 2018 Date of end of performance period  (numberof  shares) 101,360 31Dec19 106,611 31Dec20 – – – 207,971 10,683 117,693 5,115 – 31Dec17 144,340 31Dec18 114,177 31Dec19 111,763 31Dec20 10,683 117,693 5,115 370,280 9,057 99,781 4,336 – 31Dec17 136,836 31Dec18 108,357 31Dec19 138,846 31Dec20 349,310 138,846 9,057 99,781 4,336 384,039 113,940 50,668 274,100 247,690 215,298 686,398 215,298 18,927 2,993 33,116 27,940 89,439 82,976 89,439 209,222 30,132 332,870 263,401 257,813 1,672 1,611.5 1,279 1,672 1,750 1,672 1,417.5 1,279 1,672 1,750 1,672 1,611.5 1,279 1,672 1,750 9,238 101,788 12,152 45,264 5,404 7,770 – 31Dec17 – 31Dec17 274,100 31Dec18 247,690 31Dec19 215,298 31Dec20 17,008 147,052 17,556 737,088 1,643 261 18,139 2,868 788 125 – 31Dec17 – 31Dec17 33,116 31Dec18 27,940 31Dec19 89,439 31Dec20 1,904 21,007 913 150,495 18,198 200,508 8,714 28,878 1,254 2,658 – 31Dec17 – 31Dec17 332,870 31Dec18 263,401 31Dec19 257,813 31Dec20 835,625 257,813 20,856 229,386 9,968 854,084 Notes 1 TheawardsforBarryStoweweremadeinADRs(1ADR=2ordinaryshares).Thefiguresinthetablearerepresentedintermsofordinaryshares. 2 Theawardin2015forMikeWellswasmadeinADRs(1ADR=2ordinaryshares).Alloftheawardsfrom2016onwardsweremadeinordinaryshares.Thefiguresinthetableare representedintermsofordinaryshares. 3 Adividendequivalentwasaccumulatedontheseawards. 166 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration reportOther share awards ThetablebelowsetsoutExecutiveDirectors’deferredbonusshareawards. Conditional share awards outstanding at 1 Jan 2018  (number  ofshares) Year of grant Conditionally awarded in 2018  (number  ofshares) Dividends accumulated in 20183  (number  ofshares) Shares released in 2018  (number  ofshares) Conditional share awards outstanding at 31 Dec 2018  (number  ofshares) Date of end of restricted period Date of release Market price at date of award Market price at date of vesting or release  (pence)  (pence) Mark FitzPatrick Deferred2017annual incentiveaward 2018 27,414 27,414 – 705 705 28,119 31Dec20 28,119 – 1,750 John Foley Deferred2014annual incentiveaward Deferred2015annual incentiveaward Deferred2016annual incentiveaward Deferred2017annual incentiveaward Nic Nicandrou Deferred2014annual incentiveaward Deferred2015annual incentiveaward Deferred2016annual incentiveaward Deferred2017annual incentiveaward Barry Stowe1 Deferred2014annual incentiveaward Deferred2015annual incentiveaward Deferred2016annual incentiveaward Deferred2017annual incentiveaward James Turner Deferred2014group deferredbonus planaward Deferred2015group deferredbonus planaward Mike Wells2 Deferred2014annual incentiveaward Deferred2015annual incentiveaward Deferred2016annual incentiveaward Deferred2017annual incentiveaward 2015 2016 2017 2018 2015 2016 2017 2018 2015 2016 2017 2018 44,783 67,418 31,139 143,340 29,373 29,373 30,662 40,121 30,269 101,052 29,800 114,518 138,028 282,346 30,788 30,788 111,652 111,652 44,783 – 31Dec17 03Apr18 1,672 1,747 69,154 31Dec18 31,940 31Dec19 30,128 31Dec20 1,279 1,672 1,750 44,783 131,222 30,662 – 31Dec17 03Apr18 1,672 1,747 41,153 31Dec18 31,048 31Dec19 31,580 31Dec20 1,279 1,672 1,750 30,662 103,781 29,800 – 31Dec17 03Apr18 1,672 1,747 117,452 31Dec18 141,564 31Dec19 114,512 31Dec20 373,528 29,800 1,279 1,672 1,750 1,736 801 755 3,292 1,032 779 792 2,603 2,934 3,536 2,860 9,330 2015 3,917 3,917 – 31Dec17 03Apr18 1,672 1,747 2016 2015 2016 2017 2018 5,305 9,222 123,822 109,890 52,703 286,415 135 135 3,917 5,440 31Dec18 5,440 – 1,279 123,822 – 31Dec17 03Apr18 1,672 1,747 2,830 1,357 47,443 47,443 1,221 5,408 123,822 112,720 31Dec18 54,060 31Dec19 48,664 31Dec20 215,444 1,279 1,672 1,750 Notes 1 TheawardsforBarryStoweweremadeinADRs(1ADR=2ordinaryshares).Thefiguresinthetablearerepresentedintermsofordinaryshares. 2 TheawardforMikeWellsin2015wasmadeinADRs(1ADR=2ordinaryshares).Alloftheawardsmadefrom2016onwardsweremadeinordinaryshares.Thefiguresinthetable arerepresentedintermsofordinaryshares. 3 Adividendequivalentwasaccumulatedontheseawards. www.prudential.co.uk AnnualReport2018 Prudential plc 167 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationAll-employee share plans ItisimportantthatallemployeesareofferedtheopportunitytoownsharesinPrudential,connectingthembothtothesuccessofthe Companyandtotheinterestsofothershareholders.ExecutiveDirectorsareinvitedtoparticipateintheseplansonthesamebasisas otherstaffintheirlocation. Save As You Earn (SAYE) schemes UK-basedExecutiveDirectorsarenormallyeligibletoparticipateintheHMRevenueandCustoms(HMRC)approvedPrudential Savings-RelatedShareOptionScheme.Thisschemeallowsalleligibleemployeestosavetowardstheexerciseofoptionsover Prudentialplcshareswiththeoptionpricesetatthebeginningofthesavingsperiodatadiscountofupto20percentofthemarketprice. Since2014participantshavebeenabletoelecttoenterintosavingscontractsofupto£500permonthforaperiodofthreeorfiveyears. Attheendofthisterm,participantsmayexercisetheiroptionswithinsixmonthsandpurchaseshares.Ifanoptionisnotexercisedwithin sixmonths,participantsareentitledtoarefundoftheircashsavingsplusinterestifapplicableundertherules.Sharesareissuedtosatisfy thoseoptionswhichareexercised.Nooptionsmaybegrantedundertheschemesifthegrantwouldcausethenumberofshareswhich havebeenissued,orwhichremainissuablepursuanttooptionsgrantedinthepreceding10yearsundertheschemeandanyotheroption schemesoperatedbytheCompany,orwhichhavebeenissuedunderanyothershareincentiveschemeoftheCompany,toexceed 10percentoftheCompany’sordinarysharecapitalattheproposeddateofgrant.InanticipationofthedemergeroftheM&GPrudential businesstheCompanydidnotoperatetheSAYEin2018. DetailsofExecutiveDirectors’rightsundertheSAYEschemearesetoutinthe‘Outstandingshareoptions’table. Share Incentive Plan (SIP) UK-basedExecutiveDirectorsarealsoeligibletoparticipateintheCompany’sShareIncentivePlan(SIP).SinceApril2014,allUK-based employeeshavebeenabletopurchasePrudentialplcsharesuptoavalueof£150permonthfromtheirgrosssalary(partnershipshares) throughtheSIP.Foreveryfourpartnershipsharesbought,anadditionalmatchingshareisawardedwhichispurchasedbyPrudentialplc ontheopenmarket.Dividendsharesaccumulatewhiletheemployeeparticipatesintheplan.Iftheemployeewithdrawsfromtheplan, orleavestheGroup,matchingsharesmaybeforfeited. ThetablebelowprovidesinformationaboutsharespurchasedundertheSIPtogetherwithmatchingshares(awardedona1:4basis)and dividendshares. MarkFitzPatrick JohnFoley NicNicandrou1 JamesTurner2 MikeWells Year of initial grant Share Incentive Plan awards held in Trust at 1 Jan 2018  (numberof  shares) Partnership shares accumulated in 2018  (numberof  shares) Matching shares accumulated in 2018  (numberof  shares) Dividend shares accumulated in 2018  (numberof  shares) Share Incentive Plan awards held in Trust at 31 Dec 2018  (numberof  shares) 2017 2014 2010 2011 2015 81 576 1,766 479 408 104 103 – 172 103 26 26 – 43 25 3 16 47 15 12 214 721 1,813 709 548 Notes 1 FollowingNicNicandrou’sappointmentasChiefExecutiveofPrudentialCorporationAsiaon17July2017,heisnolongereligibletoparticipateintheSIP.However,whilehisshares remainintheSIPTrusthewillreceiveanydividendspayableontheseshares. 2 ThenumberofsharesforJamesTurnerreflectshisSIPholdingonhisappointmentasanExecutiveDirectoron1March2018. Cash-settled long-term incentive awards ThisinformationhasbeenpreparedinlinewiththereportingrequirementsoftheHongKongStockExchangeandsetsoutExecutive Directors’outstandingshareawardsandshareoptions.Fordetailsofthecash-settledlong-termincentiveawardsheldbysome ExecutiveDirectors,pleaseseeourAnnualreportonremuneration. Dilution ReleasesfromthePrudentialLongTermIncentivePlanandthePrudentialAgencyLongTermIncentivePlanaresatisfiedusingnewissue sharesratherthanbypurchasingsharesintheopenmarket.Sharesrelatingtooptionsgrantedunderall-employeeshareplansarealso satisfiedbynewissueshares.Thecombineddilutionfromalloutstandingsharesandoptionsat31December2018was1.11percent ofthetotalsharecapitalatthetime.Deferredbonusawardswillcontinuetobesatisfiedbythepurchaseofsharesintheopenmarket. 168 Prudential plc AnnualReport2018 www.prudential.co.uk Directors’ remuneration report continuedFive highest paid individuals Ofthefiveindividualswiththehighestemolumentsin2018,threewereExecutiveDirectorswhoseemolumentsaredisclosedinthis report.Theaggregateoftheemolumentsoftheothertwoindividualsfor2018wereasfollows: Basesalaries,allowancesandbenefitsinkind Pensioncontributions Performancerelatedpay Total Theiremolumentswerewithinthefollowingbands: £7,200,001-£7,300,000 £16,600,001-£16,700,000 2018 £000 2,810 104 20,993 23,907 Number of five highest paid employees 2018 1 1 www.prudential.co.uk AnnualReport2018 Prudential plc 169 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information 170  Prudential plc  Annual Report 2018  www.prudential.co.uk 0 1 G r o u p o v e r v e w i 0 2 i S t r a t e g c r e p o r t 0 3 G o v e r n a n c e 0 4 D i r e c t o r s ’ r e m u n e r a t i o n r e p o r t 0 5 i F n a n c a i Page 172 320 322 329 330 l s t a t e m e n t s 0 6 E u r o p e a n E m b e d d e d V a u e ( E E V ) b a s i s r e s u l t s l 0 7 A d d i t i o n a l i n f o r m a t i o n 05 Financial statements Index to Group IFRS financial statements Parent company financial statements Notes on the parent company financial statements Statement of Directors’ responsibilities Independent auditor’s report to Prudential plc www.prudential.co.uk  Annual Report 2018  Prudential plc  171                                     Index to Group IFRS financial statements Primary statements Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of financial position Consolidated statement of cash flows Page Section 173 174 175 177 178 C4 Policyholder liabilities and unallocated surplus C4.1 Movement and duration of liabilities C4.1(a)  Group overview C4.1(b)  Asia insurance operations C4.1(c)  US insurance operations C4.1(d)  UK and Europe insurance  operations C4.2 C4.2(a)  Asia C4.2(b)  US C4.2(c)  UK and Europe Products and determining contract liabilities Section C5 Page C6 Page 241 244 246 248 250 253 259 265 266 269 270 271 272 274 275 280 282 283 284 284 291 292 292 293 295 295 296 297 298 298 299 299 300 300 313 C5.1 C5.2 Intangible assets Goodwill  Deferred acquisition costs and other  intangible assets  Borrowings Core structural borrowings of  shareholder-financed businesses C6.2 Other borrowings C6.3 Maturity analysis C6.1 C7 C8 C9 C10 C11 C12 C13 C14 D D1 D2 D3 D4 D5 D6 E E1 C7.1 C7.2 C7.3 C7.4 C7.5 C8.1 C8.2 Risk and sensitivity analysis Group overview Asia insurance operations US insurance operations UK and Europe insurance operations Asset management and other operations Tax assets and liabilities Deferred tax Current tax Defined benefit pension schemes Share capital, share premium and own shares Provisions  Capital C12.1 Group objectives, policies and processes  C12.2 C12.3 for managing capital Local capital regulations Transferability of available capital Property, plant and equipment Investment properties D1.1 D1.2 Other notes Corporate transactions Gains/(losses) on disposal of businesses  and corporate transactions Acquisition of TMB Asset Management Co., Ltd.  in Thailand Contingencies and related obligations Post balance sheet events Related party transactions Commitments Investments in subsidiary undertakings,  joint ventures and associates Further accounting policies Other significant accounting policies  Notes to the Primary statements A A1 A2 A3 Background and critical accounting policies Basis of preparation and exchange rates New accounting pronouncements in 2018 Accounting policies Critical accounting policies, estimates  and judgements New accounting pronouncements   not yet effective A3.1 A3.2 B1.1 B1.2 B1.3 B1.4 B1.5 B1.6 B2.1 B2.2 B2.3 B2.4 C2.1 C2.2 C2.3 B B1 B2 B3 B4 B5 B6 C C1 C2 C3 B1.6(a) Asia B1.6(b) US B1.6(c) UK and Europe Earnings performance Analysis of performance by segment Segment results – profit before tax Short-term fluctuations in investment returns  on shareholder-backed business Determining operating segments and  performance measure of operating segments Segmental income statement Other investment return Additional analysis of performance  by segment components Acquisition costs and other expenditure Staff and employment costs Share-based payment Key management remuneration Fees payable to the auditor Effect of changes and other accounting matters  on insurance assets and liabilities Tax charge Earnings per share Dividends Balance sheet notes Analysis of Group statement of financial position  by segment Analysis of segment statement of financial position  by business type Asia US UK and Europe  Assets and liabilities Group assets and liabilities – measurement Debt securities Loans portfolio Financial instruments – additional information C3.1 C3.2 C3.3 C3.4 C3.4(a) Financial risk C3.4(b) Derivatives and hedging C3.4(c) Derecognition, collateral  and offsetting 179 180 180 189 193 194 196 200 202 202 203 204 205 206 208 208 209 210 213 214 215 218 219 220 221 229 235 236 238 239 172  Prudential plc  Annual Report 2018  www.prudential.co.uk Consolidated income statement Grosspremiumsearned Outwardreinsurancepremiums note (i) Earnedpremiums,netofreinsurance Investmentreturn Otherincome note (ii) Totalrevenue,netofreinsurance Benefitsandclaims note (i) Outwardreinsurers’shareofbenefitandclaims note (i) Movementinunallocatedsurplusofwith-profitsfunds Benefitsandclaimsandmovementinunallocatedsurplusofwith-profitsfunds, netofreinsurance Acquisitioncostsandotherexpenditure note (ii) Financecosts:interestoncorestructuralborrowingsofshareholder-financedbusinesses (Loss)gainondisposalofbusinessesandcorporatetransactions RemeasurementofthesoldKorealifebusiness Totalcharges,netofreinsuranceand(loss)gainondisposalofbusinesses Shareofprofitsfromjointventuresandassociates,netofrelatedtax Profitbeforetax(being tax attributable to shareholders’ and policyholders’ returns) note (iii) Lesstaxcredit(charge)attributabletopolicyholders’returns Profitbeforetaxattributabletoshareholders Totaltaxchargeattributabletopolicyholdersandshareholders Adjustmenttoremovetax(credit)chargeattributabletopolicyholders’returns Taxchargeattributabletoshareholders’returns Profit for the year Attributable to: EquityholdersoftheCompany Non-controllinginterests Profit for the year Earnings per share (in pence) BasedonprofitattributabletotheequityholdersoftheCompany: Basic Diluted Note 2018 £m 2017 £m B1.4 B1.4 B1.4 B1.4 C4.1(a)(iii) C4.1(a)(iii) C4.1(a)(iii) B1.4 B2 D1.1 B1.4 D6 B1.1 B4 B4 47,224 (14,023) 33,201 (10,263) 1,993 24,931 (27,411) 13,554 1,289 (12,568) (8,855) (410) (80) – (21,913) 291 3,309 326 3,635 (296) (326) (622) 3,013 3,010 3 3,013 44,005 (2,062) 41,943 42,189 2,258 86,390 (71,854) 2,193 (2,871) (72,532) (9,993) (425) 223 5 (82,722) 302 3,970 (674) 3,296 (1,580) 674 (906) 2,390 2,389 1 2,390 Note B5 2018 2017 116.9p 116.8p 93.1p 93.0p Notes (i) (ii) (iii) Outwardreinsurancepremiumsincludethe£(12,149)millionpaidduringtheyearinrespectofthereinsuranceoftheUKannuityportfolio.Theassociatedincreaseinreinsurance assetsisincludedinoutwardreinsurers’shareofbenefitsandclaimsandtheconsequentialchangetopolicyholderliabilitiesisincludedinbenefitsandclaims.SeenoteD1.1 forfurtherdetails. The2017comparativeresultshavebeenre-presentedfromthosepreviouslypublishedforthedeductionofcertainexpensesagainstrevenuefollowingtheadoptionofIFRS15. SeenoteA2. ThismeasureistheformalprofitbeforetaxmeasureunderIFRSbutitisnottheresultattributabletoshareholders.ThisisprincipallybecausethecorporatetaxesoftheGroup includethoseontheincomeofconsolidatedwith-profitsandunit-linkedfundsthat,throughadjustmentstobenefits,arebornebypolicyholders.Theseamountsarerequiredto beincludedinthetaxchargeoftheCompanyunderIAS12.Consequently,theprofitbeforealltaxesmeasureisnotrepresentativeofpre-taxprofitsattributabletoshareholders. Profitbeforealltaxesisdeterminedafterdeductingthecostofpolicyholderbenefitsandmovementsintheliabilityforunallocatedsurplusofwith-profitsfundsafteradjusting fortaxesbornebypolicyholders. www.prudential.co.uk AnnualReport2018 Prudential plc 173 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationConsolidated statement of comprehensive income Profit for the year Other comprehensive income (loss): Items that may be reclassified subsequently to profit or loss Exchangemovementsonforeignoperationsandnetinvestmenthedges: Exchangemovementsarisingduringtheyear CumulativeexchangegainofsoldKorealifebusinessrecycledthroughprofitorloss Relatedtax NetunrealisedvaluationmovementsonsecuritiesofUSinsuranceoperationsclassified asavailable-for-sale: Netunrealisedholding(losses)gainsarisingintheyear (Deductnetgains)addbacknetlossesincludedintheincomestatementondisposal andimpairment Total Relatedchangeinamortisationofdeferredacquisitioncosts Relatedtax Total Items that will not be reclassified to profit or loss Shareholders’shareofactuarialgainsandlossesondefinedbenefitpensionschemes: Actuarialgainsandlossesondefinedbenefitpensionschemes Relatedtax DeductamountattributabletoUKwith-profitfundstransferredtounallocatedsurplusof with-profitfunds,netofrelatedtax Othercomprehensive(loss)incomefortheyear,netofrelatedtax Totalcomprehensiveincomefortheyear Attributable to: EquityholdersoftheCompany Non-controllinginterests Total comprehensive income for the year Note 2018 £m 2017 £m 3,013 2,390 A1 C3.2(c) C5.2 C8.1 344 – 5 349 (1,606) (11) (1,617) 246 288 (1,083) (734) 134 (23) 111 (38) 73 (661) 2,352 2,348 4 2,352 (404) (61) (5) (470) 591 26 617 (76) (55) 486 16 200 (33) 167 (78) 89 105 2,495 2,494 1 2,495 174 Prudential plc AnnualReport2018 www.prudential.co.uk Consolidated statement of changes in equity Year ended 31 December 2018 £m Share capital  C10 Share premium  C10 Note Retained earnings Translation reserve Available- for-sale securities reserves Share- holders’ equity Non- controlling interests Total equity – 3,010 – – 3,010 3 3,013 Reserves Profitfortheyear Othercomprehensiveincome: Exchangemovementsonforeign operationsandnetinvestment hedges,netofrelatedtax Netunrealisedvaluationmovements, netofrelatedchangein amortisationofdeferred acquisitioncostsandrelatedtax Shareholders’shareofactuarialgains andlossesondefinedbenefit pensionschemes,netofrelatedtax Totalothercomprehensiveincome(loss) Totalcomprehensiveincomefortheyear Dividends Reservemovementsinrespect ofshare-basedpayments Changeinnon-controllinginterests Movementsinrespectofoptionto acquirenon-controllinginterests Share capital and share premium Newsharecapitalsubscribed Treasury shares Movementinownsharesinrespect ofshare-basedpaymentplans MovementinPrudentialplcshares purchasedbyunittrustsconsolidated underIFRS Netincrease(decrease)inequity Atbeginningofyear At end of year B6 D1.2 D1.2 C10 – – – – – – – – – – 1 – – – – – – – – – – – – – 73 73 3,083 (1,244) 69 – (109) 16 – – – 29 52 348 – 348 1 349 – (1,083) (1,083) – (1,083) – 348 348 – 73 (1,083) (662) (1,083) 2,348 – – – – – – – – – – – – – – (1,244) 69 – (109) 17 29 52 – 1 4 – – 7 – – – – 11 7 18 73 (661) 2,352 (1,244) 69 7 (109) 17 29 52 1,173 16,094 17,267 1 129 130 16 1,948 1,880 12,326 348 840 (1,083) 844 1,162 16,087 1,964 14,206 1,188 (239) 17,249 www.prudential.co.uk AnnualReport2018 Prudential plc 175 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationConsolidated statement of changes in equity continued Year ended 31 December 2017 £m Share capital  C10 Share premium  C10 Note Retained earnings Translation reserve Available- for-sale securities reserves Share- holders’ equity Non- controlling interests Total equity – 2,389 – – 2,389 1 2,390 (470) – (470) – (470) Reserves Profitfortheyear Othercomprehensiveincome: Exchangemovementsonforeign operationsandnetinvestment hedges,netofrelatedtax Netunrealisedvaluationmovements, netofrelatedchangein amortisationofdeferred acquisitioncostsandrelatedtax Shareholders’shareofactuarialgains andlossesondefinedbenefit pensionschemes,netofrelatedtax Totalothercomprehensiveincome(loss) Totalcomprehensiveincomefortheyear Dividends Reservemovementsinrespectof share-basedpayments Changeinnon-controllinginterests Share capital and share premium Newsharecapitalsubscribed B6 C10 Treasury shares Movementinownsharesinrespect ofshare-basedpaymentplans MovementinPrudentialplcshares purchasedbyunittrustsconsolidated underIFRS Netincrease(decrease)inequity Atbeginningofyear At end of year – – – – – – – – – – – – – – – – – – – – 21 – – – – 89 89 2,478 (1,159) 89 – – (15) (9) – – (470) (470) – – – – – – 486 486 – 486 486 – – – – – – 89 105 2,494 (1,159) 89 – 21 (15) (9) – – – 1 – – 5 – – – 6 1 7 486 89 105 2,495 (1,159) 89 5 21 (15) (9) 1,427 14,667 16,094 – 129 129 21 1,927 1,948 1,384 10,942 12,326 (470) 1,310 840 486 358 844 1,421 14,666 16,087 176 Prudential plc AnnualReport2018 www.prudential.co.uk Consolidated statement of financial position Assets Goodwill Deferredacquisitioncostsandotherintangibleassets Property,plantandequipment Reinsurers’shareofinsurancecontractliabilities Deferredtaxassets Currenttaxrecoverable Accruedinvestmentincome Otherdebtors Investmentproperties Investmentinjointventuresandassociatesaccountedforusingtheequitymethod Loans Equitysecuritiesandportfolioholdingsinunittrusts note (i) Debtsecurities note (i) Derivativeassets Otherinvestments note (i) Deposits Assetsheldforsale note (ii) Cashandcashequivalents Total assets Equity Shareholders’equity Non-controllinginterests Total equity Liabilities Insurancecontractliabilities Investmentcontractliabilitieswithdiscretionaryparticipationfeatures Investmentcontractliabilitieswithoutdiscretionaryparticipationfeatures Unallocatedsurplusofwith-profitsfunds Corestructuralborrowingsofshareholder-financedbusinesses Operationalborrowingsattributabletoshareholder-financedbusinesses Borrowingsattributabletowith-profitsbusinesses Obligationsunderfunding,securitieslendingandsaleandrepurchaseagreements Netassetvalueattributabletounitholdersofconsolidatedunittrustsandsimilarfunds Deferredtaxliabilities Currenttaxliabilities Accruals,deferredincomeandotherliabilities Provisions Derivativeliabilities Liabilitiesheldforsale note (ii) Total liabilities Total equity and liabilities Note C5.1 C5.2 C13 C4.1(a)(iv) C8.1 C8.2 C1 C1 C14 C3.3 C3.2 C3.4 C1 C1 C4.1 C4.1 C4.1 C4.1 C6.1 C6.2 C6.2 C8.1 C8.2 C1 C11 C3.4 C1 31 Dec 2018 £m 31 Dec 2017 £m 1,857 11,923 1,409 11,144 2,595 618 2,749 4,088 17,925 1,733 18,010 214,733 175,356 3,494 6,512 11,796 10,578 12,125 508,645 1,482 11,011 789 9,673 2,627 613 2,676 2,963 16,497 1,416 17,042 223,391 171,374 4,801 5,622 11,236 38 10,690 493,941 17,249 18 17,267 16,087 7 16,094 322,666 67,413 19,222 15,845 7,664 998 3,940 6,989 11,651 4,022 568 15,248 1,078 3,506 10,568 491,378 508,645 328,172 62,677 20,394 16,951 6,280 1,791 3,716 5,662 8,889 4,715 537 14,185 1,123 2,755 – 477,847 493,941 Notes (i) (ii) Includedwithinequitysecuritiesandportfolioholdingsinunittrusts,debtsecuritiesandotherinvestmentsare£8,278million(31December2017:£8,232million)oflentsecurities andassetssubjecttorepurchaseagreements. Assetsheldforsaleof£10,578millioninclude£10,568millioninrespectofthereinsuredUKannuitybusiness.Acorrespondingamountisreflectedinliabilitiesheldforsale. SeenoteD1.1forfurtherdetails. Theconsolidatedfinancialstatementsonpages173to319wereapprovedbytheBoardofDirectorson12March2019.Theyweresigned onitsbehalf: Paul Manduca Chairman www.prudential.co.uk Mike Wells Group Chief Executive Mark FitzPatrick Chief Financial Officer AnnualReport2018 Prudential plc 177 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationConsolidated statement of cash flows Cash flows from operating activities Profitbeforetax (being tax attributable to shareholders’ and policyholders’ returns) note (i) Adjustmentstoprofitbeforetaxfornon-cashmovementsinoperatingassetsandliabilities: Investments Othernon-investmentandnon-cashassets Policyholderliabilities(includingunallocatedsurplus) Otherliabilities(includingoperationalborrowings) Interestincomeandexpenseanddividendincomeincludedinresultbeforetax Note 2018 £m 2017 £m 3,309 3,970 15,456 (3,503) (17,392) 4,344 (7,861) (49,771) (968) 44,877 3,360 (8,994) Operatingcashitems: Interestreceiptsandpayments Dividendreceipts Taxpaid note (iv) Othernon-cashitems Netcashflowsfromoperatingactivities Cash flows from investing activities Purchasesofproperty,plantandequipment Proceedsfromdisposalofproperty,plantandequipment Acquisitionofbusinessesandintangibles note (v) Saleofbusinesses note (v) Netcashflowsfrominvestingactivities Cash flows from financing activities StructuralborrowingsoftheGroup: Shareholder-financedbusinesses: note (ii) Issueofsubordinateddebt,netofcosts Redemptionofsubordinateddebt Feespaidtomodifytermsandconditionsofseniordebt note (ii) Interestpaid With-profitsbusinesses: note (iii) Redemptionofsubordinateddebt Interestpaid Equitycapital: Issuesofordinarysharecapital Dividendspaid Netcashflowsfromfinancingactivities Netincreaseincashandcashequivalents Cashandcashequivalentsatbeginningofyear Effectofexchangeratechangesoncashandcashequivalents Cash and cash equivalents at end of year C13 C6.1 C6.2 5,793 2,361 (625) 582 2,464 (289) 4 (504) – (789) 1,630 (434) (33) (376) (100) (4) 17 (1,244) (544) 1,131 10,690 304 12,125 6,900 2,612 (915) 549 1,620 (134) – (351) 1,301 816 565 (751) – (369) – (9) 21 (1,159) (1,702) 734 10,065 (109) 10,690 Notes (i) (ii) ThismeasureistheformalprofitbeforetaxmeasureunderIFRSbutitisnottheresultattributabletoshareholders. Structuralborrowingsofshareholder-financedbusinessesexcludeborrowingstosupportshort-termfixedincomesecuritiesprogrammes,non-recourseborrowingsofinvestment subsidiariesofshareholder-financedbusinessesandotherborrowingsofshareholder-financedbusinesses.Cashflowsinrespectoftheseborrowingsareincludedwithincash flowsfromoperatingactivities.Thechangesinthecarryingvalueofthestructuralborrowingsofshareholder-financedbusinessesduring2018areanalysedasfollows: 2018 2017 Cash movements £m Non-cash movements £m Balance at beginning of year 6,280 6,798 Issue of debt Redemption of debt Modification of debt* Foreign exchange movement Other movements 1,630 565 (434) (751) (33) – 210 (341) 11 9 Balance at end of year 7,664 6,280 *Theamountin2018relatestofeespaidtobondholderswhoparticipatedinthevotingprocessinrespectofcertainmodificationstothetermsandconditionsoftheseniordebt. Otherthanthesefees,themodificationdidnotresultinanadjustmenttothecarryingvalueoftheseniordebt. (iii) (iv) (v) Interestpaidonstructuralborrowingsofwith-profitsbusinessesrelatessolelytothe£100million8.5percentundatedsubordinatedguaranteedbonds,whichcontributeto thesolvencybaseoftheScottishAmicableInsuranceFund(SAIF),aring-fencedsub-fundoftheUKwith-profitsfund.Thesebondswereredeemedinfullon30June2018. Cashflowsinrespectofotherborrowingsofwith-profitsfunds,whichprincipallyrelatetoconsolidatedinvestmentfunds,areincludedwithincashflowsfromoperatingactivities. Taxpaidincludes£134million(2017:£298million)paidonprofitstaxableatpolicyholderratherthanshareholderrates. Cashflowsarisingfromthe‘acquisitionofbusinessesandintangibles’and‘saleofbusinesses’includeamountspaidfordistributionrightsandcashflowsarisingfromtheacquisitions anddisposalsofbusinesses(includingsubsidiariesacquiredanddisposedbywith-profitsfundsforinvestmentpurposes). 178 Prudential plc AnnualReport2018 www.prudential.co.uk A Background and critical accounting policies A1 Basis of preparation and exchange rates Prudentialplc(‘theCompany’)togetherwithitssubsidiaries(collectively,‘theGroup’or‘Prudential’)isaninternationalfinancialservices group.TheGrouphasoperationsinAsia,theUS,theUKandEurope,andAfrica.Prudentialoffersawiderangeofretailfinancial productsandservicesandassetmanagementservicesthroughouttheseoperations.Theretailfinancialproductsandservicesprimarily includelifeinsurance,pensionsandannuitiesaswellascollectiveinvestmentschemes.On14March2018,theCompanyannouncedits intentiontodemergeM&GPrudential,itsUKandEuropebusiness,fromPrudentialplcresultingintwoseparately-listedcompanies. Whileitremainstheintentiontodemergethebusiness,M&GPrudentialhasnotbeendisclosedseparatelyasavailablefordistributionat 31December2018,asthebusinessdoesnotsatisfythecriteriaofbeingimmediatelyavailableforsaleunderIFRS5,‘Non-currentAssets HeldforSaleandDiscontinuedOperations’. Basis of preparation ThesestatementshavebeenpreparedinaccordancewithIFRSStandardsasissuedbytheInternationalAccountingStandardsBoard (IASB)andasendorsedbytheEuropeanUnion(EU)asrequiredbyEUlaw(IASRegulationEC1606/2032).EU-endorsedIFRSStandards maydifferfromIFRSStandardsissuedbytheIASBif,atanypointintime,neworamendedIFRSStandardshavenotbeenendorsedby theEU.At31December2018,therewerenounendorsedstandardseffectiveforthetwoyearsended31December2018whichimpact theconsolidatedfinancialinformationoftheGroup.TherewerenodifferencesbetweenIFRSStandardsendorsedbytheEUandIFRS StandardsissuedbytheIASBintermsoftheirapplicationtotheGroup.Thesestatementshavebeenpreparedonagoingconcernbasis. TheparentcompanystatementoffinancialpositionpreparedinaccordancewiththeUKGenerallyAcceptedAccountingPractice (includingFinancialReportingStandard101ReducedDisclosureFramework)ispresentedonpage320. TheGroupIFRSaccountingpoliciesarethesameasthoseappliedfortheyearended31December2017withtheexceptionofthe adoptionofthenewandamendedaccountingstandardsasdescribedinnoteA2. Exchange rates TheexchangeratesappliedforbalancesandtransactionsincurrencyotherthanthepresentationalcurrencyoftheGroup,pounds sterling(GBP),were: Local currency: £ HongKong Indonesia Malaysia Singapore China India Vietnam Thailand US Closing rate at 31 Dec 2018 Average rate for 2018 Closing rate at 31 Dec 2017 Average rate for 2017 9.97 18,314.37 5.26 1.74 8.74 88.92 29,541.15 41.47 1.27 10.46 18,987.65 5.38 1.80 8.82 91.25 30,732.53 43.13 1.34 10.57 18,353.44 5.47 1.81 8.81 86.34 30,719.60 44.09 1.35 10.04 17,249.38 5.54 1.78 8.71 83.90 29,279.71 43.71 1.29 Certainnotestothefinancialstatementspresent2017comparativeinformationatconstantexchangerates(CER),inadditiontothe reportingatactualexchangerates(AER)usedthroughouttheconsolidatedfinancialstatements.AERareactualhistoricalexchangerates forthespecificaccountingperiod,beingtheaverageratesovertheperiodfortheincomestatementandtheclosingratesforthebalance sheetatthebalancesheetdate.CERresultsarecalculatedbytranslatingpriorperiodresultsusingthecurrentperiodforeignexchange rate,iecurrentperiodaverageratesfortheincomestatementandcurrentperiodclosingratesforthebalancesheet. Theexchangemovementarisingduring2018recognisedinothercomprehensiveincomeis: Asiaoperations* USoperations UKandEuropeoperations Unallocatedtoasegment(otherfunds)† 2018 £m 2017 £m 222 329 – (207) 344 (295) (477) 3 304 (465) *2017includedtherecyclingofthecumulativeexchangegainofthesoldKorealifebusinessof£61milliontotheincomestatement. †Theexchangeratemovementunallocatedtoasegmentmainlyreflectsthetranslationofcurrencyborrowings,issuedbytheGroupparentcompany,thathavebeendesignatedasanet investmenthedgeagainstthecurrencyriskoftheGroup’sinvestmentintheUSoperations. www.prudential.co.uk AnnualReport2018 Prudential plc 179 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationA2 New accounting pronouncements in 2018 IFRS 15, ‘Revenue from Contracts with Customers’ TheGrouphasadoptedIFRS15,‘RevenuefromContractswithCustomers’from1January2018.Thisstandardprovidesasingle frameworktorecogniserevenueforcontractswithdifferentcharacteristicsandoverridestherevenuerecognitionrequirements previouslyprovidedinotherstandards.Thecontractsexcludedfromthescopeofthisstandardinclude: — LeasecontractswithinthescopeofIAS17,’Leases’; — InsurancecontractswithinthescopeofIFRS4,‘InsuranceContracts’;and — FinancialinstrumentswithinthescopeofIAS39,‘FinancialInstruments’. ThemainimpactsofIFRS15forPrudentialaretorevenuerecognitionforassetmanagementcontractsandinvestmentcontractsthat donotcontaindiscretionaryparticipatingfeaturesbutdoincludeinvestmentmanagementservices. InaccordancewiththetransitionprovisionsinIFRS15,theGrouphasadoptedthestandardusingthefullretrospectivemethodforall periodspresented.Theonlyimpactonthepriorperiodspresentedisaminorreclassificationintheconsolidatedincomestatementto presentcertainexpenses(suchasrebatestoclientsofassetmanagementfees)asadeductionagainstrevenue.Revenuehasbeen reducedby£234millionin2018(2017:£172million)withacorrespondingdeductioninexpenses. IFRS 9, ‘Financial Instruments’ and amendments to IFRS 4, ‘Insurance Contracts’ TheIASBpublishedacompleteversionofIFRS9inJuly2014withtheexceptionofmacrohedgeaccountingandthestandardis mandatorilyeffectiveforannualperiodsbeginningonorafter1January2018. InSeptember2016,theIASBpublishedamendmentstoIFRS4,‘ApplyingIFRS9FinancialInstrumentswithIFRS4Insurance Contracts’toaddressthetemporaryconsequencesofthedifferenteffectivedatesofIFRS9andIFRS17,‘InsuranceContracts’. TheamendmentsincludeanoptionaltemporaryexemptionfromapplyingIFRS9andtheassociatedamendmentsuntilIFRS17comes intoeffectin2021.Thistemporaryexemptionisavailabletocompanieswhosepredominantactivityistoissueinsurancecontractsbased onmeetingtheeligibilitycriteriaasat31December2015assetoutintheamendments. TheGroupmettheeligibilitycriteriafortemporaryexemptionundertheamendmentstoIFRS4fromapplyingIFRS9andhas accordinglydeferredtheadoptionofIFRS9.SeenoteA3.2forfurtherdetailsonIFRS9,includingthedisclosuresassociatedwiththe temporaryexemption. InNovember2018,theIASBtentativelydecidedthattheeffectivedateofIFRS17shouldbedelayedbyoneyearfromperiodsending onorafter1January2021to1January2022.TheIASBalsotentativelydecidedthatIFRS9couldbedelayedforinsurersbyanadditional yeartokeeptheeffectivedateofIFRS9andIFRS17aligned.ThesechangesareyettobefinalisedandtheGroupcontinuestomonitor developments. Other new accounting pronouncements Inadditiontotheabove,thefollowingnewaccountingpronouncementsarealsoeffectivefrom1January2018: — IFRIC22,‘ForeignCurrencyTransactionsandAdvanceConsideration’; — Classificationandmeasurementofshare-basedpaymenttransactions(amendmentstoIFRS2,‘Share-basedpayment’); — TransfersofInvestmentProperty(amendmentstoIAS40,‘Investmentproperty’);and — AnnualImprovementstoIFRSs2014–2016Cycle. ThesepronouncementshavehadnoeffectontheGroup’sfinancialstatements. A3 Accounting policies A3.1 Critical accounting policies, estimates and judgements Thisnotepresentsthecriticalaccountingpolicies,accountingestimatesandjudgementsappliedinpreparingtheGroup’sconsolidated financialstatements.OthersignificantaccountingpoliciesarepresentedinnoteE1.Allaccountingpoliciesareappliedconsistentlyfor bothyearspresentedandnormallyarenotsubjecttochangesunlessnewaccountingstandards,interpretationsoramendmentsare introducedbytheIASB. ThepreparationofthesefinancialstatementsrequiresPrudentialtomakeestimatesandjudgementsabouttheamountsofassets, liabilities,revenuesandexpenses,whicharebothrecognisedandunrecognised(egcontingentliabilities)intheprimaryfinancial statements.Prudentialevaluatesitsestimates,includingthoserelatedtolong-termbusinessprovisioningandthefairvalueofassetsas required.BelowaresetoutthosecriticalaccountingpoliciestheapplicationofwhichrequirestheGrouptomakecriticalestimatesand judgements.AlsosetoutarefurthercriticalaccountingpoliciesaffectingthepresentationoftheGroup’sresultsandotheritemsthat requiretheapplicationofcriticalestimatesandjudgements. 180 Prudential plc AnnualReport2018 www.prudential.co.uk A Background and critical accounting policies continued(a) Critical accounting policies with linked critical estimates and judgements Classification of insurance and investment contracts IFRS4requirescontractswritten byinsurerstobeclassifiedaseither ‘insurance’contractsor‘investment’ contracts.Theclassificationofthe contractdeterminesitsaccounting. Impacts£433billionofreportedliabilities, requiringclassification. Judgementisappliedinconsidering whetherthematerialfeaturesofa contractgivesrisetothetransfer ofsignificantinsurancerisk. ContractsthattransfersignificantinsurancerisktotheGroupareclassifiedasinsurance contracts.Thisjudgementismadeatthepointofcontractinceptionandisnotrevisited. ForthemajorityoftheGroup’scontracts,classificationisbasedonareadilyidentifiable scenariothatdemonstratesasignificantdifferenceincashflowsifthecoveredevent occurs(asopposedtodoesnotoccur)reducingthelevelofjudgementinvolved. ContractsthattransferfinancialrisktotheGroupbutnotsignificantinsuranceriskare classifiedasinvestmentcontracts.Furthermore,somecontracts,bothinsuranceand investment,containdiscretionaryparticipatingfeaturesrepresentingthecontractualright toreceiveadditionalbenefitsasasupplementtoguaranteedbenefitsthat(i)arelikelyto beasignificantportionofthetotalcontractbenefits;(ii)haveanamountortiming contractuallyatthediscretionoftheinsurer;and(iii)arecontractuallybasedonassetor fundperformance,asdiscussedinIFRS4.Insurancecontractsandinvestmentcontracts withdiscretionaryparticipationfeaturesareaccountedforunderIFRS4.Investment contractswithoutsuchdiscretionaryparticipationfeaturesareaccountedforasfinancial instrumentsunderIAS39. Insurance business units Asia Insurance contracts and investment contracts with discretionary participation features Investment contracts without discretionary participation features — With-profitscontracts — Non-participatingterm — Minoramountsforanumber ofsmallcategoriesofbusiness contracts — Wholelifecontracts — Unit-linkedpolicies — Accidentandhealthpolicies US — Variableannuitycontracts — Fixedannuitycontracts — Fixedindexannuitycontracts — Grouppayoutannuity — Guaranteedinvestment contracts(GICs) — Minoramountsof‘annuity certain’contracts contracts — Lifeinsurancecontracts UKandEurope — With-profitscontracts — Bulkandindividualannuity — Certainunit-linkedsavings andsimilarcontracts business — Non-participatingterm contracts www.prudential.co.uk AnnualReport2018 Prudential plc 181 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationA3 Accounting policies continued A3.1 Critical accounting policies, estimates and judgements continued Measurement of policyholder liabilities and unallocated surplus of with-profits Themeasurementbasisofpolicyholder liabilitiesisdependentuponthe classificationofthecontractsunderIFRS4 describedabove. Impacts£433billionofliabilities. Policyholderliabilitiesareestimatedbased onanumberofactuarialassumptions(eg mortality,morbidity,policyholder behaviourandexpenses). Measurementofinsurancecontract liabilitiesandinvestmentcontractliabilities withdiscretionaryparticipationfeatures. Asia insurance operations US insurance operations (Jackson) IFRS4permitsthecontinuedusageofpreviouslyappliedGenerallyAcceptedAccounting Practices(GAAP)forinsurancecontractsandinvestmentcontractswithdiscretionary participatingfeatures. AmodifiedstatutorybasisofreportingwasadoptedbytheGrouponfirsttimeadoption ofIFRSin2005.ThiswassetoutintheStatementofRecommendedPracticeissuedby theAssociationofBritishInsurers(ABISORP).AnexceptionwasforUKregulated with-profitsfundswhichweremeasuredunderFRS27,‘LifeAssurance’asdiscussedbelow. FRS27andtheABISORPwerewithdrawnfortheaccountingperiodsbeginninginorafter 2015.Asusedintheseconsolidatedfinancialstatements,theterms‘grandfathered’FRS 27andthe‘grandfathered’ABISORPrefertotherequirementsofthesepronouncements priortotheirwithdrawal. Forinvestmentcontractsthatdonotcontaindiscretionaryparticipatingfeatures,IAS39 isappliedand,wherethecontractincludesaninvestmentmanagementelement,IFRS15, ‘Revenue’,applies. Thepoliciesappliedineachbusinessunitarenotedbelow.Whenmeasuringpolicyholder contractliabilitiesanumberofassumptionsareappliedtoestimatefutureamountsdue toorfromthepolicyholder.Thenatureofassumptionvariesbyproductandamongthe mostsignificantareassumedratesofpolicyholders’mortality,particularlyinrespectof annuitiessoldintheUK,andpolicyholderbehaviour,particularlyintheUS.Additional detailsofvaluationmethodologiesandassumptionsappliedformaterialproducttypes arediscussedinnoteC4.2. ThepolicyholderliabilitiesforbusinessesinAsiaaregenerallydeterminedinaccordance withmethodsprescribedbylocalGAAPadjustedtocomply,wherenecessary,withthe modifiedstatutorybasis.Refinementstothelocalreservingmethodologyaregenerally treatedaschangesinestimates,dependentontheirnature.Insomeoperations,Taiwan andIndia,USGAAPprinciplesareapplied. Whilethebasisofvaluationofliabilitiesinthisbusinessisinaccordancewiththe requirementsofthe‘grandfathered’ABISORP,itmaydifferfromthatdeterminedonthe modifiedstatutorybasisfortheUKandEuropeinsuranceoperationswiththesamefeatures. ThesensitivityofAsiainsuranceoperationstovariationsinkeyestimatesandassumptions, includingmortalityandmorbidity,isdiscussedinnoteC7.2. ThepolicyholderliabilitiesforJackson’sconventionalprotection-typepoliciesare determinedunderUSGAAPprincipleswithlockedinassumptionsformortality,interest, policylapsesandexpensesalongwithprovisionsforadversedeviations.Forother policies,thepolicyholderliabilitiesincludethepolicyholderaccountbalance. ForthoseinvestmentcontractsintheUSwithfixedandguaranteedterms,theGroupuses theamortisedcostmodeltomeasuretheliability.TheUShasnoinvestmentcontracts withdiscretionaryparticipationfeatures. ThesensitivityofUSinsuranceoperationstovariationsinkeyestimatesandassumptions, includingpolicyholderbehaviour,isdiscussedinnoteC7.3. 182 Prudential plc AnnualReport2018 www.prudential.co.uk A Background and critical accounting policies continuedMeasurement of policyholder liabilities and unallocated surplus of with-profits continued UK and Europe insurance operations TheUKregulatedwith-profitsfunds’liabilitiesaretherealisticbasisliabilitiesin accordancewith‘grandfathered’FRS27.Therealisticbasisrequiresthevalueofliabilities tobecalculatedas: — Awith-profitsbenefitsreserve;plus — Futurepolicy-relatedliabilities;plus — Therealisticcurrentliabilitiesofthefund. Thewith-profitsbenefitsreserveisprimarilybasedontheretrospectivecalculationof accumulatedassetsharesbutisadjustedtoreflectfuturepolicyholderbenefitsandother chargesandexpenses.Assetsharesbroadlyreflectthepolicyholders’shareofthe with-profitsfundassetsattributabletotheirpolicies. Thefuturepolicy-relatedliabilitiesmustincludeamarketconsistentvaluationofcosts ofguarantees,optionsandsmoothing,lessanyrelatedcharges,andthisamountis determinedusingeitherastochasticapproach,hedgingcostsoraseriesofdeterministic projectionswithattributedprobabilities. Theshareholders’shareoffuturecostsofbonusesisincludedwithintheliabilitiesfor unallocatedsurplus.Shareholders’shareofprofitisrecognisedinlinewiththedistribution ofbonusestopolicyholders. Forthepurposesoflocalregulations,segregatedaccountsareestablishedforlinked businessforwhichpolicyholderbenefitsarewhollyorpartlydeterminedbyreference tospecificinvestmentsortoaninvestment-relatedindex. Theinterestratesusedinestablishingpolicyholderbenefitprovisionsforpension annuitiesinthecourseofpaymentareadjustedeachreportingperiodandincludean allowanceforcreditrisk(seenoteB3).Mortalityratesusedinestablishingpolicyholder benefitsarebasedonpublishedmortalitytablesadjustedtoreflectactualexperience. ThesensitivityoftheUKandEuropeinsuranceoperationstovariationsinkeyestimates andassumptions,includingannuitantmortality,isdiscussedinnoteC7.4. Investmentcontractswithoutdiscretionaryparticipationfeaturesaremeasuredin accordancewithIAS39toreflectthedepositnatureofthearrangement,withpremiums andclaimsreflectedasdepositsandwithdrawalsandtakendirectlytothestatement offinancialpositionasmovementsinthefinancialliabilitybalance. Incremental,directlyattributableacquisitioncostsrelatingtotheinvestmentmanagement elementofthesecontractsarecapitalisedandamortisedinlinewiththerelatedrevenue. Ifthecontractsinvolveup-frontcharges,thisincomeisalsodeferredandamortised throughtheincomestatementinlinewithcontractualserviceprovisioninaccordance withIFRS15. Investmentcontractswithoutfixedandguaranteedtermsareclassifiedasfinancial instrumentsanddesignatedasfairvaluethroughprofitorlossbecausetheresulting liabilitiesaremanagedandtheirperformanceisevaluatedonafairvaluebasis.Wherethe contractincludesasurrenderoptionitscarryingvalueissubjecttoaminimumcarrying valueequaltoitssurrendervalue. Otherinvestmentcontractsaremeasuredatamortisedcost. Representstheexcessofassetsoverpolicyholderliabilitiesthataredeterminedin accordancewiththeGroup’saccountingpoliciesandarebasedonlocalGAAPforthe Group’swith-profitsfundsintheUK,HongKongandMalaysiathathaveyettobe appropriatedbetweenpolicyholdersandshareholders.Theunallocatedsurplusis recordedwhollyasaliabilitywithnoallocationtoequity.Theannualexcess(shortfall) ofincomeoverexpenditureofthewith-profitsfunds,afterdeclarationandattribution ofthecostofbonusestopolicyholdersandshareholders,istransferredto(from)the unallocatedsurpluseachyearthroughacharge(credit)totheincomestatement. Thebalanceretainedintheunallocatedsurplusrepresentscumulativeincomearising onthewith-profitsbusinessthathasnotbeenallocatedtopolicyholdersorshareholders. Thebalanceoftheunallocatedsurplusisdeterminedafterfullprovisionfordeferredtax onunrealisedappreciationoninvestments. Measurementofinvestmentcontract liabilitieswithoutdiscretionary participationfeatures. Measurementofunallocatedsurplus ofwith-profitsfunds. www.prudential.co.uk AnnualReport2018 Prudential plc 183 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationA3 Accounting policies continued A3.1 Critical accounting policies, estimates and judgements continued Measurement of policyholder liabilities and unallocated surplus of with-profits continued Liabilityadequacytest. TheGroupperformsadequacytestingonitsinsuranceliabilitiestoensurethatthe carryingamounts(netofrelateddeferredacquisitioncosts)and,whererelevant,present valueofacquiredin-forcebusinessissufficienttocovercurrentestimatesoffuturecash flows.Anydeficiencyisimmediatelychargedtotheincomestatement. Jackson’sliabilitiesforinsurancecontracts,whichincludethoseforseparateaccounts (reflectingseparateaccountassets),policyholderaccountvaluesandguarantees measuredasdescribedinnoteC4.2andtheassociateddeferredacquisitioncostasset aremeasuredunderUSGAAPandliabilityadequacytestingisperformedinthiscontext. UnderUSGAAP,mostofJackson’sproductsareaccountedforunderAccounting StandardsCodificationTopic944,FinancialServices–InsuranceoftheFinancial AccountingStandardsBoard(ASC944)wherebydeferredacquisitioncostsareamortised inlinewithexpectedgrossprofits.Recoverabilityofthedeferredacquisitioncostsinthe balancesheetistestedagainsttheprojectedvalueoffutureprofitsusingcurrentestimates andthereforenoadditionalliabilityadequacytestisrequiredbyIFRS4.TheDAC recoverabilitytestisperformedinlinewithUSGAAPrequirementswhichinpractice isatagroupedlevelofthosecontractsmanagedtogether. (b) Further critical accounting policies Measurement and presentation of derivatives and debt securities of US insurance operations Jacksonholdsanumberofderivative instrumentsanddebtsecurities. Theselectionoftheaccountingapproach fortheseitemssignificantlyaffectsthe volatilityofIFRSprofitbeforetax. £(2,014)millionoftheUSincome statementinvestmentreturnarisesfrom suchderivativesanddebtsecurities. Jacksonentersintoderivativeinstrumentstomitigateeconomicexposures.TheGroup hasconsideredwhetheritisappropriatetoundertakethenecessaryoperationalchanges toqualifyforhedgeaccountingsoastoachievematchingofvaluemovementsinhedging instrumentsandhedgeditemsintheperformancestatements.Thekeyfactorsconsidered inthisassessmentwerethecomplexityofassetandliabilitymatchinginJackson’sproduct rangeandthedifficultyandcostofapplyingthemacrohedgeprovisionsunderIAS39 (whicharemoresuitedtobankingarrangements)toJackson’sderivativebook. TheGrouphasdecidedthat,exceptforoccasionalcircumstances,applyinghedge accountingusingIAS39toderivativeinstrumentsheldbyJacksonwouldnotimprove therelevanceorreliabilityofthefinancialstatementstosuchanextentthatwouldjustify thedifficultyandcostofapplyingtheseprovisions.Asaresultofthisdecision,thetotal incomestatementresultsaremorevolatileasthemovementsinthefairvalueofJackson’s derivativesarereflectedwithinit.Thisvolatilityisreflectedinthelevelofshort-term fluctuationsininvestmentreturns,asshowninnotesB1.1andB1.2. UnderIAS39,unlesscarriedatamortisedcost(subjecttoimpairmentprovisionswhere appropriate)undertheheld-to-maturitycategory,debtsecuritiesarealsocarriedat fairvalue.TheGrouphaschosennottoclassifyanyfinancialassetsasheld-to-maturity. DebtsecuritiesofJacksonaredesignatedasavailable-for-salewithvaluemovements, unlessimpaired,beingrecordedasmovementswithinothercomprehensiveincome. Impairmentsarerecordedintheincomestatement. 184 Prudential plc AnnualReport2018 www.prudential.co.uk A Background and critical accounting policies continuedPresentation of results before tax ProfitbeforetaxisasignificantIFRS incomestatementitem.TheGrouphas chosentopresentameasureofprofit beforetaxattributabletoshareholders whichdistinguishesbetweentax attributabletopolicyholdersand unallocatedsurplusandtaxborneby shareholders,tosupportunderstanding oftheperformanceoftheGroup. Profitbeforetaxattributableto shareholdersis£3,635millionand comparestoprofitbeforetaxof £3,309million. ThetotaltaxchargefortheGroupreflectstaxthat,inadditiontorelatingtoshareholders’ profits,isalsoattributabletopolicyholdersandunallocatedsurplusofwith-profitsfunds andunit-linkedpolicies.FurtherdetailisprovidedinnoteB4.Reportedprofitbefore thetotaltaxchargeisnotrepresentativeofpre-taxprofitsattributabletoshareholders. Accordingly,inordertoprovideameasureofpre-taxprofitsattributabletoshareholders theGrouphaschosentoadoptanincomestatementpresentationofthetaxchargeand pre-taxresultsthatdistinguishesbetweenpolicyholderandshareholdercomponents. Segmental analysis of results and earnings attributable to shareholders TheGroupusesadjustedIFRSoperating profitbasedonlonger-terminvestment returnsasthesegmentalmeasureof itsresults. TotalsegmentaladjustedIFRSoperating profitbasedonlonger-terminvestment returnsis£5,717millionandisshown innoteB1.1. ThebasisofcalculationofadjustedIFRSoperatingprofitbasedonlonger-terminvestment returnsisdisclosedinnoteB1.3. Forshareholder-backedbusiness,withtheexceptionofdebtsecuritiesheldbyJackson andassetsclassifiedasloansandreceivablesatamortisedcost,allfinancialinvestments andinvestmentpropertyaredesignatedasassetsatfairvaluethroughprofitorloss. Short-termfluctuationsinfairvalueaffecttheresultfortheyearandtheGroupprovides additionalanalysisofresultsbeforeandaftertheeffectsofshort-termfluctuationsin investmentreturns,togetherwithotheritemsthatareofashort-term,volatileorone-off nature.Theeffectsofshort-termfluctuationsincludeasymmetricimpactswherethe measurementbasesoftheliabilitiesandassociatedderivativesusedtomanagethe JacksonannuitybusinessdifferasdescribedinnoteB1.2. Short-termfluctuationsininvestmentreturnsonassetsheldbywith-profitsfundsinthe UK,HongKong,MalaysiaandSingapore,donotaffectdirectlyreportedshareholder results.Thisisbecause(i)theunallocatedsurplusofwith-profitsfundsisaccountedfor asaliabilityand(ii)excessordeficitsofincomeandexpenditureofthefundsoverthe requiredsurplusfordistributionaretransferredtoorfrompolicyholderliabilities (includingtheunallocatedsurplus). (c) Further critical estimates or judgements Deferred acquisition costs for insurance contracts TheGroupappliesjudgementin determiningqualifyingcoststhatshould becapitalised(iethosecostsofacquiring newinsurancebusinessthatmeetthe criteriaundertheGroup’saccounting policyfordeferredacquisitioncosts). TheGroupestimatesprojectedfuture profits/marginstoassesswhether adjustmentstothecarryingvalue oramortisationprofileofdeferred acquisitioncostassetsarenecessary. £10.1billionofdeferredacquisitioncosts aspernoteC5.2(b). Exceptforacquisitioncostsofwith-profitscontractsoftheUKregulatedwith-profits funds,whichareaccountedforunderthe‘grandfathered’FRS27,costsofacquiringnew insurancebusinessareaccountedforinawaythatisconsistentwiththeprinciplesofthe ’grandfathered’ABISORPwithdeferralandamortisationagainstmarginsinfuture revenuesontherelatedinsurancepolicies.Ingeneral,thisdeferralisshownbyanexplicit carryingvalueinthebalancesheet.However,insomeAsiaoperationsthedeferralis implicitthroughthereservingmethodology.Therecoverabilityofthedeferredacquisition costsismeasuredandisdeemedimpairediftheprojectedmargins(whichareestimated basedonanumberofassumptionssimilartothoseunderlyingpolicyholderliabilities) arelessthanthecarryingvalue.Totheextentthatthefuturemarginsdifferfromthose anticipated,thenanadjustmenttothecarryingvaluewillbenecessaryeitherthrough animpairment(iftheprojectedmarginsarelowerthancarryingvalue)orthroughachange intheamortisationprofile. www.prudential.co.uk AnnualReport2018 Prudential plc 185 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationA3 Accounting policies continued A3.1 Critical accounting policies, estimates and judgements continued Deferred acquisition costs for insurance contracts continued Asia insurance operations US insurance operations UK and Europe insurance operations ForthosebusinessunitsapplyingUSGAAPtoinsuranceassetsandliabilities,aspermitted bythe‘grandfathered’ABISORP,principlessimilartothosesetoutintheUSinsurance operationsparagraphbelowareappliedtothedeferralandamortisationofacquisition costs.ForotherterritoriesinAsia,thegeneralprinciplesofthe‘grandfathered’ABISORP areappliedwith,asdescribedabove,deferralofacquisitioncostsbeingeitherexplicit orimplicitthroughthereservingbasis. Themostmaterialestimatesandassumptionsappliedinthemeasurementand amortisationofdeferredacquisitioncostbalancesrelatetotheUSinsuranceoperations. TheGroup’sUSinsuranceoperationsapplyFASBASU2010-26on‘AccountingforCosts AssociatedwithAcquiringorRenewingInsuranceContracts’andcapitaliseonlythose incrementalcostsdirectlyrelatingtosuccessfullyacquiringacontract. Fortermlifebusiness,acquisitioncostsaredeferredandamortisedinlinewithexpected premiums.Forannuityandinterest-sensitivelifebusiness,acquisitioncostsaredeferred andamortisedinlinewithexpectedgrossprofitsontherelevantcontracts.Forfixed andfixedindexannuityandinterest-sensitivelifebusiness,thekeyassumptionisthe long-termspreadbetweentheearnedrateoninvestmentsandtheratecreditedto policyholders.Inaddition,expectedgrossprofitsdependonmortalityassumptions, assumedunitcostsandlapses(includingtherelatedcharges),allofwhicharebased onacombinationofJackson’sactualexperience,industrybenchmarkingandfuture expectations.Adetailedanalysisofactualmortality,lapseandexpensesexperience isperformedusinginternallydevelopedexperiencestudies. ForUSvariableannuitybusiness,akeyassumptionisthelong-terminvestmentreturn fromtheseparateaccounts.Jacksonusesameanreversionmethodologythatsetsthe projectedlevelofreturnforeachofthenextfiveyearssuchthatthesereturnsin combinationwiththeactualratesofreturnfortheprecedingthreeyears,includingthe currentyear,averagetheassumedlong-termannualreturn(grossofassetmanagement feesandotherchargestopolicyholders,butnetofexternalfundmanagementfees)over theeightyearperiod.Projectedreturnsafterthemeanreversionperiodrevertbacktothe long-terminvestmentreturn.Forfurtherdetailsoncurrentbalances,assumptionsand sensitivity,refertonoteC5.2(b)andC7.3(iv). Toensurethatthemethodologyinextrememarketmovementsproducesfutureexpected returnsthatarerealistic,themeanreversiontechniquehasacapandfloorfeaturewhereby theprojectedreturnsineachofthenextfiveyearscanbenomorethan15percentper annumandnolessthan0percentperannum(bothgrossofassetmanagementfeesand otherchargestopolicyholders,butnetofexternalfundmanagementfees)ineachyear. Jacksonmakescertainadjustmentstothedeferredacquisitioncostswhicharerecognised directlyinothercomprehensiveincome(‘shadowaccounting’)tomatchtherecognition ofunrealisedgainsorlossesonavailable-for-salesecuritiescausingtheadjustments Moreprecisely,shadowdeferredacquisitioncostsadjustmentsreflectthechangein deferredacquisitioncoststhatwouldhaveariseniftheassetsheldinthestatementof financialpositionhadbeensold,crystallisingunrealisedgainsorlosses,andtheproceeds reinvestedattheyieldscurrentlyavailableinthemarket. ForUKregulatedwith-profitsfundswhere‘grandfathered’FRS27isapplied,thesecosts areexpensedasincurred.ThemajorityoftheUKshareholder-backedbusinessis individualandgroupannuitybusinesswherethedeferralofacquisitioncostsisnegligible. 186 Prudential plc AnnualReport2018 www.prudential.co.uk A Background and critical accounting policies continuedFinancial investments – Valuation Financialinvestmentsheldatfairvalue represent£401.3billionoftheGroup’s totalassets. Financialinvestmentsheldatamortised costrepresent£13.3billionoftheGroup’s totalassets. TheGroupestimatesthefairvalueof financialinvestments,thatarenotactively traded,usingquotationsfromindependent thirdpartiesorinternallydeveloped pricingmodels. TheGroupholdsthemajorityofitsfinancialinvestmentsatfairvalue(eitherthroughprofit andlossoravailable-for-sale).Informationontheinclusionwithintheincomestatementof gains/lossesarisingondebtsecuritiesclassifiedasavailable-for-saleisincludedinnote E1(e)(i).Financialinvestmentsheldatamortisedcostprimarilycompriseloansand deposits. Determination of fair value TheGroupusescurrentbidpricestovalueitsinvestmentshavingquotedprices.Actively tradedinvestmentswithoutquotedpricesarevaluedusingpricesprovidedbythird partiesasdescribedfurtherinnoteC3.1.Financialinvestmentsmeasuredatfairvalue areclassifiedintoathree-levelhierarchyasdescribedinnoteC3.1(b). IfthemarketforafinancialinvestmentoftheGroupisnotactive,theGroupestablishes fairvaluebyusingquotationsfromindependentthirdparties,suchasbrokersorpricing services,orbyusinginternallydevelopedpricingmodels.Priorityisgiventopublicly availablepricesfromindependentsourceswhenavailable,butoverallthesourceof pricingand/orthevaluationtechniqueischosenwiththeobjectiveofarrivingatafair valuemeasurementwhichreflectsthepriceatwhichanorderlytransactionwouldtake placebetweenmarketparticipantsonthemeasurementdate.Thevaluationtechniques includetheuseofrecentarm’slengthtransactions,referencetootherinstrumentsthat aresubstantiallythesame,discountedcashflowanalysis,option-adjustedspreadmodels and,ifapplicable,enterprisevaluationandmayincludeanumberofassumptionsrelating tovariablessuchascreditriskandinterestrates.Changesinassumptionsrelatingtothese variablescouldpositivelyornegativelyimpactthereportedfairvalueofthesefinancial investments.Detailsofthefinancialinvestmentsclassifiedas‘level3’towhichvaluation techniquesareapplied,andthesensitivityofprofitbeforetaxtoachangeintheseitems’ valuation,arepresentedinnoteC3.1(d). Determination of impaired value Inestimatingthepresentvalueoffuturecashflowsfordeterminingtheimpairedvalue ofinstrumentsheldatamortisedcost,theGrouplooksattheexpectedcashflowsofthe assetsandapplieshistoricallossexperienceofassetswithsimilarcreditrisksthathas beenadjustedforconditionsinthehistoricallossexperiencewhichnolongerexist,orfor conditionsthatareexpectedtoarise.Theestimatedfuturecashflowsarediscounted usingthefinancialasset’seffectiveinterestrateandexcludecreditlossesthathavenotyet beenincurred. InestimatinganyrequiredimpairmentforUSresidentialmortgage-backedandother asset-backedsecuritiesheldasavailable-for-sale,theexpectedvalueoffuturecashflows isdeterminedusingamodel,thekeyassumptionsofwhichincludehowmuchofthe currentlydelinquentloanswilleventuallydefaultandassumedlossseverity.Further detailsoftheassumptionsandestimatesappliedinassessingimpairmentofUSavailable- for-salesecuritiesisgiveninnoteC3.2(g). www.prudential.co.uk AnnualReport2018 Prudential plc 187 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationA3 Accounting policies continued A3.1 Critical accounting policies, estimates and judgements continued Financial investments – Determining impairment in relation to financial assets TheGroupappliesjudgementtoassess whetherfactorssuchastheseverity anddurationofthedeclineinfairvalue, thefinancialconditionandtheprospects oftheissuerindicateanimpairmentin valueoffinancialinvestmentsclassified as‘available-for-sale’or‘atamortisedcost’. Ifevidenceforimpairmentexists,valuation techniques,includingestimates,arethen appliedindeterminingtheimpairedvalue. TheGroupestimatestheimpairedvalue offinancialinvestmentsbasedonits expectationofdiscountedfuturecashflows. Affects£54.2billionofassets. Forfinancialinvestmentsclassifiedas‘available-for-sale’or‘atamortisedcost,’ifaloss eventthatwillhaveadetrimentaleffectoncashflowsisidentified,animpairmentlossis recognisedintheincomestatement.Thelossrecognisedisdeterminedasthedifference betweenthebookcostandthefairvalueoftherelevantimpairmentassets.Theloss comprisestheeffectoftheexpectedlossofcontractualcashflowsandanyadditional market-pricedriventemporaryreductionsinvalues. Available-for-sale securities TheGroup’sreviewoffairvalueinvolvesseveralfactors,includingeconomicconditions, creditlossexperience,otherissuer-specificdevelopmentsandfuturecashflows.These assessmentsarebasedonthebestavailableinformationatthetime.Factorssuchas marketliquidity,thewideningofbid/askspreadsandachangeincashflowassumptions cancontributetofuturepricevolatility.Ifactualexperiencediffersnegativelyfromthe assumptionsandotherconsiderationsusedintheconsolidatedfinancialstatements, unrealisedlossescurrentlyinequitymayberecognisedintheincomestatementinfuture periods.Additionaldetailsonthemethodologyandestimatesusedtodetermine impairmentsoftheavailable-for-salesecuritiesofJacksonaredescribedinnoteC3.2(g). ThemajorityoftheUSinsuranceoperation’sdebtsecuritiesportfolioisaccountedfor onanavailable-for-salebasis.Theconsiderationofevidenceofimpairmentrequires management’sjudgement.Inmakingthisdeterminationarangeofmarketandindustry indicatorsareconsideredincludingtheseverityanddurationofthedeclineinfairvalue andthefinancialconditionandprospectsoftheissuer. ForUSresidentialmortgage-backedandotherasset-backedsecurities,allofwhichare classifiedasavailable-for-sale,impairmentisestimatedusingamodelofexpectedfuture cashflows.Keyassumptionsusedinthemodelincludeassumptionsabouthowmuch ofthecurrentlydelinquentloanswilleventuallydefaultandassumedlossseverity. Assets held at amortised cost Whenassetsheldatamortisedcostaresubjecttoimpairmenttestingestimatedfuture cashflowsarecomparedtothecarryingvalueoftheasset.Inestimatingfuturecashflows, theGrouplooksattheexpectedcashflowsoftheassetsandapplieshistoricalloss experienceofassetswithsimilarcreditrisksthathasbeenadjustedforconditionsinthe historicallossexperiencewhichnolongerexist,orforconditionsthatareexpectedto arise.Theestimatedfuturecashflowsarediscountedusingthefinancialasset’soriginalor variableeffectiveinterestrateandexcludecreditlossesthathavenotyetbeenincurred. Reversal of impairment losses If,insubsequentperiods,animpaireddebtsecurityheldonanavailable-for-salebasis oranimpairedloanorreceivablerecoversinvalue(inpartorinfull),andthisrecovery canbeobjectivelyrelatedtoaneventoccurringaftertheimpairment,thenanyamount determinedtohavebeenrecoveredisreversedthroughtheincomestatement. 188 Prudential plc AnnualReport2018 www.prudential.co.uk A Background and critical accounting policies continuedIntangible assets – Carrying value of distribution rights TheGroupappliesjudgementtoassess whetherfactorssuchasthefinancial performanceofthedistribution arrangement,changesinrelevant legislationandregulatoryrequirements indicateimpairmentofintangibleassets representingdistributionrights. TodeterminetheimpairedvaluetheGroup estimatesthediscountedfutureexpected cashflowsarisingfromdistributionrights. Affects£1.7billionofassets. Distributionrightsrelatetobancassurancepartnershiparrangementsforbankdistribution ofproductsforthetermofthecontractualagreementwiththebankpartner,forwhichan assetisrecognisedbasedonfeespaid.Distributionrightsimpairmenttestingisconducted whenthereisanindicationofimpairment. Toassessindicatorsofimpairment,theGroupmonitorsanumberofinternalandexternal factors,includingindicationsthatthefinancialperformanceofthearrangementislikely tobeworsethanoriginallyexpectedandchangesinrelevantlegislationandregulatory requirementsthatcouldimpacttheGroup’sabilitytocontinuetosellnewbusiness throughthebancassurancechannel,andthenappliesjudgementtoassesswhether thesefactorsindicateimpairmenthasoccurred. Ifanimpairmenthasoccurred,animpairmentchargeisrecognisedforthedifference betweenthecarryingvalueandrecoverableamountoftheassetwhichisrecognisedin theincomestatement.Therecoverableamountisthegreateroffairvaluelesscoststosell andvalueinuse.Valueinuseiscalculatedasthepresentvalueoffutureexpectedcash flowsfromtheassetorthecashgeneratingunittowhichitisallocated. A3.2 New accounting pronouncements not yet effective Thefollowingstandards,interpretationsandamendmentshavebeenissuedbutarenotyeteffectivein2018,includingthosewhichhave notyetbeenadoptedintheEU.Thisisnotintendedtobeacompletelistasonlythosestandards,interpretationsandamendmentsthat couldhaveamaterialimpactupontheGroup’sfinancialstatementsarediscussed. Accounting pronouncements endorsed by the EU but not yet effective IFRS 9, ‘Financial instruments: Classification and measurement’ InJuly2014,theIASBpublishedacompleteversionofIFRS9withtheexceptionofmacrohedgeaccounting.Thestandardbecame mandatorilyeffectivefortheannualperiodsbeginningonorafter1January2018,withearlyapplicationpermittedandtransitional rulesapply. AsdiscussedinnoteA2,theGroupmettheeligibilitycriteriafortemporaryexemptionundertheAmendmentstoIFRS4from applyingIFRS9in2018andhasaccordinglydeferredtheadoptionofIFRS9untilIFRS17,‘InsuranceContracts’isadopteduponits mandatoryeffectivedate.TheGroupiseligibleasitsactivitiesarepredominantlytoissueinsurancecontractsbasedonthecriteriaasset outintheamendmentstoIFRS4.ThedisclosureofthefairvalueoftheGroup’sfinancialassets,showingtheamountsforinstruments thatmeetthe‘SolelyforPaymentofPrincipalandInterest’(SPPI)criteriaseparatelyfromallotherfinancialassets,asrequiredforentities applyingthetemporaryexemptionisprovidedbelow. WhenadoptedIFRS9replacestheexistingIAS39,’FinancialInstruments–RecognitionandMeasurement’,andwillaffectthe followingthreeareas: — The classification and the measurement of financial assets and liabilities IFRS9redefinestheclassificationoffinancialassets.Basedonthewayinwhichtheassetsaremanagedinordertogeneratecash flowsandtheircontractualcashflowcharacteristics(whetherthecashflowsrepresent‘solelypaymentsofprincipalandinterest’), financialassetsareclassifiedintooneofthefollowingcategories:amortisedcost,fairvaluethroughothercomprehensiveincome (FVOCI)andfairvaluethroughprofitorloss(FVTPL).Anoptionisalsoavailableatinitialrecognitiontoirrevocablydesignatea financialassetasatFVTPLifdoingsoeliminatesorsignificantlyreducesaccountingmismatches. UnderIAS39,85percentoftheGroup’sinvestmentsarevaluedatFVTPLandtheGroup’scurrentexpectationisthatasignificant proportionwillcontinuetobedesignatedassuchunderIFRS9. TheexistingIAS39amortisedcostmeasurementforfinancialliabilitiesislargelymaintainedunderIFRS9.Forfinancialliabilities designatedatFVTPLIFRS9requireschangesinfairvalueduetochangesinentity’sowncreditrisktoberecognisedinother comprehensiveincome. — The calculation of the impairment charge relevant for financial assets held at amortised cost or FVOCI AnewimpairmentmodelbasedonanexpectedcreditlossapproachreplacestheexistingIAS39incurredlossimpairmentmodel, resultinginearlierrecognitionofcreditlossescomparedtoIAS39. ThisaspectisthemostcomplexareaofIFRS9toimplementandwillinvolvesignificantjudgementsandestimationprocesses.The Groupiscurrentlyassessingthescopeofassetstowhichtheserequirementswillapply. — The hedge accounting requirementswhicharemorecloselyalignedwiththeriskmanagementactivitiesoftheCompany. NosignificantchangetotheGroup’shedgeaccountingiscurrentlyanticipated,butthisremainsunderreview. www.prudential.co.uk AnnualReport2018 Prudential plc 189 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationA3 Accounting policies continued A3.2 New accounting pronouncements not yet effective continued TheGroupisassessingtheimpactofIFRS9andimplementingthisstandardinconjunctionwiththeIFRS17.FurtherdetailsonIFRS17 areprovidedbelow. Theparentcompanyandanumberofnon-insuranceUKandAsiasubsidiarieswithintheGrouphaveadoptedIFRS9in2018intheir individualorseparatefinancialstatementswherethesestatementsarepreparedinaccordancewithIFRS,includingtheUKFinancial ReportingStandard101ReducedDisclosureFramework.Inaddition,PrudentialPensionsLimited,aUKinsurancesubsidiaryhas adoptedIFRS9initsindividualfinancialstatementsasitdidnotmeettheeligibilitycriteriafortemporaryexemption.PrudentialPensions Limitedwritesmostlyunit-linkedproductsthatareclassifiedasinvestmentcontractswithoutdiscretionaryparticipationfeature. TheresultsfortheseentitiescontinuetobeaccountedforonanIAS39basisintheseconsolidatedfinancialstatements. The2018individualfinancialstatementsoftheUKsubsidiariesthatincludeIFRS9informationrelevanttothecurrentyear,canbe obtainedpubliclywhenfiledwiththeUKRegistrarofCompanieslaterintheyearviatheUKCompaniesHousewebsite.Thesefinancial statementsincludethoseofPrudentialPensionsLimitedreferredtoabove,theconsolidatedandindividualfinancialstatementsofM&G GroupLimitedanditsUKoperatingsubsidiariesandthefinancialstatementsofPrudentialCapitalplc,PrudentialCorporationHoldings Limited,PrudentialHoldingsLimitedandM&GPrudentialLimited.FortheAsiasubsidiariesthatadoptedIFRS9intheirindividual financialstatements,thepublicavailabilityofthesestatementsvariesaccordingtothelocallawsandregulationsofeachjurisdiction. ThefairvalueoftheGroup’sdirectlyheldfinancialassetsat31December2018isshownbelow.Financialassetswithcontractualterms thatgiveriseonspecifieddatestocashflowsthataresolelypaymentsofprincipalandinterest(SPPI)asdefinedbyIFRS9areshown separately.Thisexcludesfinancialassetsthatmeetthedefinitionofheldfortradingoraremanagedandevaluatedonafairvaluebasis. Financial assets on the Group’s statement of financial position Accruedinvestmentincome Otherdebtors Loans(1) Equitysecuritiesandportfolioholdingsinunittrusts Debtsecurities(2) Derivativeassets,netofderivativeliabilities Otherinvestments Deposits Cashandcashequivalents Totalfinancialassets,netofderivativeliabilities Financial assets that pass the SPPI test All other financial assets, net of derivative liabilities Fair value at 31 Dec 2018 £m Movement in the fair value during the year £m Fair value at 31 Dec 2018 £m Movement in the fair value during the year £m 2,749 4,088 11,914 – 39,522 – – 11,796 12,125 82,194 – – (493) – (1,574) – – – – (2,067) – – 6,505 214,733 135,834 (12) 6,512 – – 363,572 – – (175) (16,359) (3,343) (941) 466 – – (20,352) Notes Further information on the loans and debt securities that pass the SPPI test (1) (2) TheloansthatpasstheSPPItestinthetableaboveareprimarilycarriedatamortisedcostunderIAS39.FurtherinformationontheseloansisasprovidedinnoteC3.3. ThedebtsecuritiesthatpasstheSPPItestinthetableabovearewhollyheldbyJacksonandareclassifiedasavailable-for-saleunderIAS39.Thecreditratingsofthesesecurities, analysedonthesamebasisofthosedisclosedinnoteC3.2,areasfollows: 31 Dec 2018 £m Jackson AAA AA+ to AA- A+ to A- BBB+ to BBB- Below BBB- Other Total fair value Debtsecuritiesthatpass theSPPItest 652 7,252 10,214 14,315 843 6,246 39,522 190 Prudential plc AnnualReport2018 www.prudential.co.uk A Background and critical accounting policies continuedTheunderlyingfinancialassetsoftheGroup’sjointventuresandassociatesaccountedforusingtheequitymethodareanalysedbelow intothosewhichmeettheSPPIconditionofIFRS9,excludinganyfinancialassetsthatmeetthedefinitionofheldfortradingorare managedandevaluatedonafairvaluebasis,andallotherfinancialassets.Fairvalueinformationforjointventuresandassociatesisalso setoutinthetablebelow: Financial assets held by the Group’s joint ventures and associates accounted for using the equity method Accruedinvestmentincome Otherdebtors Loans Equitysecuritiesandportfolioholdingsinunittrusts Debtsecurities Deposits Cashandcashequivalents Totalfinancialassets,netofderivativeliabilities Financial assets that pass the SPPI test All other financial assets, net of derivative liabilities Fair value at 31 Dec 2018 £m Movement in the fair value during the year £m Fair value at 31 Dec 2018 £m Movement in the fair value during the year £m 131 212 117 – – 355 396 1,211 – – – – – – – – – – – 3,677 4,247 – – 7,924 – – – (281) 86 – – (195) IFRS 16, ‘Leases’ InJanuary2016,theIASBpublishedIFRS16,‘Leases’effectiveforperiodsbeginningonorafter1January2019,withearlieradoption permittedifIFRS15,‘RevenuefromContractswithCustomers’hasalsobeenapplied.Thenewstandardbringsmostleaseson-balance- sheetforlesseesunderasinglemodel,eliminatingthedistinctionbetweenoperatingandfinanceleases.Forlesseeaccounting,thishas theeffectofrequiringmostoftheexistingoperatingleasestobeaccountedforinasimilarmannerasfinanceleasesundertheexisting IAS17,‘Leases’.Theonlyoptionalexemptionsareforshort-termleasesandleasesoflow-valueassets.Lessoraccounting,however, remainslargelyunchangedfromIAS17. IFRS16willapplyprimarilytooperatingleasesofmajorpropertiesoccupiedbytheGroup’sbusinesseswherePrudentialisalessee. UnderIFRS16,theseleaseswillbebroughtontotheGroup’sstatementoffinancialpositionwitha‘rightofuse’assetbeingestablished andacorrespondingliabilityrepresentingtheobligationtomakeleasepayments.Thecurrentrentalaccrualchargeintheincome statementwillbereplacedwithadepreciationchargeforthe‘rightofuse’assetandaninterestexpenseontheleaseliabilityleadingtoa morefront-loadedoperatingleasecostprofilecomparedtoIAS17. IFRS16permitstransitiontothenewstandardthroughamodifiedretrospectiveapproachorafullretrospectiveapproach.Underthe modifiedretrospectiveapproach,aswellasaffordinganumberofsimplifications,theGroup’scomparativeinformationisnotrestated, buttheremaybeanadjustmenttoretainedearningsatthedateofinitialapplication(ie1January2019)dependingontheoptionusedto measure‘right-of-useasset’.Underthemodifiedretrospectiveapproach,alesseehastheoptiontochoose,onalease-by-leasebasis,to measurethe‘right-of-use’assetateitheritscarryingamountasifthestandardhadbeenappliedsincethecommencementofthelease (referredtoas‘modifiedretrospectiveapproachoptionA’)oranamountequaltothediscountedremainingleasepaymentsadjustedby anyprepaidoraccruedleasepaymentbalanceimmediatelybeforethedateofinitialapplicationofthestandard(referredtoas‘modified retrospectiveapproachoptionB’). FollowingthecompletionoftheIFRS16implementationproject,theGrouphasadoptedIFRS16from1January2019usingthe modifiedretrospectiveapproachoptionB.Itisestimatedthatapplicationofthestandardwillresultinrecognitionofanadditionallease liabilityamountingtoapproximately£0.8billionandacorresponding‘right-of-use’assettoasimilaramountasat1January2019.These amountsremainsubjecttoongoingrefinementandverification.UnderthemodifiedretrospectiveapproachoptionBthereisno adjustmenttotheGroup’sretainedearningsat1January2019.ForexistingfinanceleaseswheretheGroupisalessee,thecarrying amountofthe‘right-of-use’assetandleaseliabilityat1January2019willbedeterminedbasedonthecarryingamountoftheleaseasset andleaseliabilityimmediatelybeforethatdatemeasuredapplyingIAS17. TheGroupwillapplythepracticalexpedienttograndfatherthedefinitionofaleaseontransition.ThismeansthatitwillapplyIFRS16 toallcontracts,whichwereidentifiedasleasesinaccordancewithIAS17andIFRIC4,‘DeterminingwhetheranArrangementcontainsa Lease’,enteredintobefore1January2019.TheGroupalsowillapplythepracticalexpedienttouseasinglediscountratetoaportfolioof leaseswithreasonablysimilarcharacteristics.Accordingly,forsuchportfolios,theincrementalborrowingratesusedtodiscountthe futureleasepaymentswillbedeterminedbasedoncountryspecificrisk-freeratesadjustedwithamargin/spreadtoreflecttheGroup’s creditstanding,leasetermandtheoutstandingleasepayments. www.prudential.co.uk AnnualReport2018 Prudential plc 191 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationA3 Accounting policies continued A3.2 New accounting pronouncements not yet effective continued Accounting pronouncements not yet endorsed by the EU IFRS 17, ‘Insurance Contracts’ InMay2017,theIASBissuedIFRS17,‘InsuranceContracts’toreplacetheexistingIFRS4,‘InsuranceContracts’.Thestandard,which issubjecttoendorsementintheEUandotherterritories,appliestoannualperiodsbeginningonorafter1January2021.InNovember 2018,theIASBtentativelydecidedtodelaytheeffectivedateofIFRS17byoneyeartoperiodsbeginningonorafter1January2022 andisconsideringfurtheramendmentstothisnewstandard.Earlyapplicationispermitted,providedtheentityalsoappliesIFRS9 onorbeforethedateitfirstappliesIFRS17.TheGroupintendstoadoptthenewstandardonitsmandatoryeffectivedate,alongside theadoptionofIFRS9. IFRS4permittedinsurerstocontinuetousethestatutorybasisofaccountingforinsuranceassetsandliabilitiesthatexistedintheir jurisdictionspriortoJanuary2005.IFRS17replacesthiswithanewmeasurementmodelforallinsurancecontracts. IFRS17requiresliabilitiesforinsurancecontractstoberecognisedasthepresentvalueoffuturecashflows,incorporatinganexplicit riskadjustment,whichisupdatedateachreportingdatetoreflectcurrentconditions,andacontractualservicemargin(CSM)thatis equalandoppositetoanyday-onegainarisingoninitialrecognition.Lossesarerecogniseddirectlyintotheincomestatement.For measurementpurposes,contractsaregroupedtogetherintocontractsofsimilarrisk,profitabilityprofileandissueyear,withfurther divisionsforcontractsthataremanagedseparately. ProfitforinsurancecontractsunderIFRS17isrepresentedbytherecognitionoftheservicesprovidedtopolicyholdersintheperiod (releaseoftheCSM),releasefromnon-economicrisk(releaseofriskadjustment)andinvestmentprofit. TheCSMisreleasedasprofitoverthecoverageperiodoftheinsurancecontract,reflectingthedeliveryofservicestothe policyholder.Forcertaincontractswithparticipatingfeatures(whereasubstantialshareofthefairvalueoftherelatedinvestmentsand otherunderlyingitemsispaidtopolicyholders)suchastheGroup’swith-profitsproducts,theCSMreflectsthevariablefeeto shareholders.Forthesecontracts,theCSMisadjustedtoreflectthechangesineconomicexperienceandassumptions.Forallother contractstheCSMisonlyadjustedfornon-economicassumptions. IFRS17introducesanewmeasureofinsurancerevenue,basedonthedeliveryofservicestopolicyholdersandexcludingany premiumsrelatedtotheinvestmentelementsofpolicies,whichwillbesignificantlydifferentfromexistingpremiumrevenuemeasures, currentlyreportedintheincomestatement.InordertotransitiontoIFRS17,theamountofdeferredprofit,beingtheCSMattransition date,needstobedetermined. IFRS17requiresthisCSMtobecalculatedasifthestandardhadappliedretrospectively.Howeverifthisisnotpracticalanentityis requiredtochooseeitherasimplifiedretrospectiveapproachortodeterminetheCSMbyreferencetothefairvalueoftheliabilitiesatthe transitiondate.TheapproachfordeterminingtheCSMwillhaveasignificantimpactonbothshareholders’equityandontheamountof profitsonin-forcebusinessinfuturereportingperiods. IFRS 17 Implementation Programme IFRS17isexpectedtohaveasignificantimpactastherequirementsofthenewstandardarecomplexandrequiresafundamental changetoaccountingforinsurancecontractsaswellastheapplicationofsignificantjudgementandnewestimationtechniques. TheeffectofchangesrequiredtotheGroup’saccountingpoliciesasaresultofimplementingthesestandardsarecurrentlyuncertain, butthesechangescanbeexpectedto,amongotherthings,alterthetimingofIFRSprofitrecognition.Giventheimplementationofthis standardislikelytoinvolvesignificantenhancementstoIT,actuarialandfinancesystemsoftheGroup,itwillalsohaveanimpactonthe Group’sexpenses. TheGrouphasaGroup-wideimplementationprogrammeunderwaytoimplementIFRS17andIFRS9.Theprogrammeisresponsible forsettingGroup-wideaccountingpoliciesanddevelopingapplicationmethodologies,establishingappropriateprocessesandcontrols, sourcingappropriatedataandimplementingactuarialandfinancesystemchanges. AGroup-wideSteeringCommittee,chairedbytheGroupChiefFinancialOfficerwithparticipationfromtheGroupRiskfunctionand theGroup’sandbusinessunits’seniorfinancemanagers,providesoversightandstrategicdirectiontotheimplementationprogramme. Anumberofsub-committeesarealsoinplacetoprovidegovernanceoverthetechnicalinterpretationandaccountingpoliciesselected, programmemanagement,designanddeliveryoftheprogramme. TheGroupremainsontracktostartprovidingIFRS17financialstatementsinlinewiththerequirementsforinterimreportingatits effectivedate,whichiscurrentlyexpectedtobe2022. Other new accounting pronouncements Inadditiontotheabove,thefollowingnewaccountingpronouncementshavealsobeenissuedandarenotyeteffectivebuttheGroup isnotexpectingthemtohaveasignificantimpactontheGroup’sfinancialstatements: — IFRICInterpretation23,‘Uncertaintyoverincometaxtreatments’,issuedinJune2017andeffectivefrom1January2019. ThisinterpretationhasbeenendorsedbytheEU; — AmendmentstoIAS28,‘Long-termInterestsinAssociatesandJointVentures’,issuedinOctober2017andeffectivefrom 1January2019; — AnnualImprovementstoIFRSs2015-2017cycleissuedinDecember2017andeffectivefromJanuary2019; — AmendmentstoIAS19,‘PlanAmendment,CurtailmentorSettlement’,issuedinFebruary2018andeffectivefrom 1January2019; — AmendmenttoIFRS3,‘BusinessCombinations’,issuedinOctober2018andeffectivefrom1January2020;and — AmendmentstoIAS1andIAS8,‘Definitionofmaterial’,issuedinOctober2018andeffectivefrom1January2020. 192 Prudential plc AnnualReport2018 www.prudential.co.uk A Background and critical accounting policies continuedB Earnings performance B1 Analysis of performance by segment B1.1 Segment results – profit before tax Asia: Insuranceoperations Assetmanagement Total Asia US: Jackson(USinsuranceoperations) Assetmanagement Total US UK and Europe: UKandEuropeinsuranceoperations: Long-termbusiness Generalinsurancecommission note (i) TotalUKandEuropeinsuranceoperations UKandEuropeassetmanagement note (v) Total UK and Europe Total segment profit Other income and expenditure: Investmentreturnandotherincome Interestpayableoncorestructural borrowings Corporateexpenditure note (ii) Totalotherincomeandexpenditure Restructuringcosts Adjusted IFRS operating profit based on longer-term investment returns Short-termfluctuationsininvestmentreturns onshareholder-backedbusiness Amortisationofacquisitionaccounting adjustments note (iii) (Loss)gainondisposalofbusinesses andcorporatetransactions Profit before tax Taxchargeattributabletoshareholders’returns Profit for the year Attributable to: EquityholdersoftheCompany Non-controllinginterests 2018 £m 2017 £m 2018 vs 2017 % AER note(iv) CER note(iv) AER note(iv) CER note(iv) Note B3(i) B3(iii) 1,982 182 2,164 1,911 8 1,919 1,138 19 1,157 477 1,634 5,717 52 (410) (367) (725) (165) 1,799 176 1,975 2,214 10 2,224 861 17 878 500 1,378 5,577 11 (425) (361) (775) (103) 1,727 171 1,898 2,137 9 2,146 861 17 878 500 1,378 5,422 11 (425) (355) (769) (103) 4,827 4,699 4,550 B1.2 (558) (1,563) (1,514) D1.1 B4 (46) (63) (61) (588) 3,635 (622) 3,013 223 3,296 (906) 2,390 218 3,193 (876) 2,317 10% 3% 10% (14)% (20)% (14)% 32% 12% 32% (5)% 19% 3% 373% 4% (2)% 6% (60)% 3% 64% 27% n/a 10% 31% 26% 15% 6% 14% (11)% (11)% (11)% 32% 12% 32% (5)% 19% 5% 373% 4% (3)% 6% (60)% 6% 63% 25% n/a 14% 29% 30% 3,010 3 2,389 1 2,316 1 26% 200% 30% 200% www.prudential.co.uk AnnualReport2018 Prudential plc 193 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationB1 Analysis of performance by segment continued B1.1 Segment results – profit before tax continued Basic earnings per share (in pence) BasedonadjustedIFRSoperatingprofitbased onlonger-terminvestmentreturns note (vi) Basedonprofitfortheyear Note B5 B5 2018 2017 2018 vs 2017 % AER note(iv) CER note(iv) AER note(iv) CER note(iv) 156.6p 116.9p 145.2p 93.1p 140.4p 90.0p 8% 26% 12% 30% Themajorityofthegeneralinsurancecommissionisnotexpectedtorecurinfutureyears. CorporateexpenditureasshownaboveisprimarilyforGroupHeadOfficeandAsiaRegionalHeadOffice. Notes (i) (ii) (iii) AmortisationofacquisitionaccountingadjustmentsprincipallyrelatetotheREALICbusinessofJacksonwhichwasacquiredin2012. (iv) FordefinitionsofAERandCERrefertonoteA1.Thedifferencebetween‘Profitfortheyearattributabletoshareholders’intheprioryearonanAERbasisandaCERbasisis £73million,arisingfromtheretranslationoftheprioryearresultsoftheGroup’sforeignsubsidiariesintoGBPusingtheexchangeratesappliedtotheequivalentcurrentyearresults. (v) UKandEuropeassetmanagementadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns: Assetmanagementfeeincome Otherincome Staffcosts* Othercosts* Underlyingprofitbeforeperformance-relatedfees Shareofassociateresults Performance-relatedfees TotalUKandEuropeassetmanagementadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns 2018 £m 2017 £m 1,098 2 (384) (270) 446 16 15 477 1,027 7 (400) (202) 432 15 53 500 *Staffandothercostsinclude£27millionofchargesincurredpreparingforBrexit. (vi) Taxchargeshavebeenreflectedasoperatingandnon-operatinginthesamewayasforthepre-taxitems.FurtherdetailsontaxchargesareprovidedinnoteB4. B1.2 Short-term fluctuations in investment returns on shareholder-backed business Asiaoperations note (i) USoperations note (ii) UKandEuropeoperations note (iii) Otheroperations note (iv) Total 2018 £m 2017 £m (512) (100) 34 20 (558) (1) (1,568) (14) 20 (1,563) Notes (i)  Asia operations InAsia,thenegativeshort-termfluctuationsof£(512)million(2017:negative£(1)million)principallyreflectnetvaluemovementsonassetsandrelatedliabilitiesfollowingincreases inbondyieldsandfallsinequitymarketsduringtheyear,especiallyinthosecountrieswherepolicyholderliabilitiesuseavaluationinterestratewhichdoesnotreflectall movementsininterestratesintheperiod. (ii) US operations  Theshort-termfluctuationsininvestmentreturnsforUSinsuranceoperationsarereportednetoftherelatedchargeforamortisationofdeferredacquisitioncostsof£(114)million asshowninnoteC5.2(a)(2017:creditof£462million)andcompriseamountsinrespectofthefollowingitems: 2018 £m 2017 £m Netequityhedgeresult note (a) Otherthanequity-relatedderivatives note (b) Debtsecurities note (c) Equity-typeinvestments:actuallesslonger-termreturn Otheritems Total (58) (64) (31) 38 15 (100) (1,490) (36) (73) 12 19 (1,568) Notes (a) Netequityhedgeresult  ThenetequityhedgeresultrelatestotheaccountingeffectofmarketmovementsonboththevalueofguaranteesinJackson’svariableannuityandfixedindexannuity productsandontherelatedderivativesusedtomanagetheexposuresinherentintheseguarantees.Theleveloffeesrecognisedinnon-operatingprofitisdeterminedby referencetothatallowedforwithinthereservingbasis.ThevariableannuityguaranteesarevaluedinaccordancewitheitherAccountingStandardsCodification(ASC)Topic 820,FairValueMeasurementsandDisclosures(formerlyFAS157)orASCTopic944,FinancialServices–Insurance(formerlySOP03-01)dependingonthetypeofguarantee. Bothapproachesrequireanentitytodeterminethetotalfee(‘thefeeassessment’)thatisexpectedtofundfutureprojectedbenefitpaymentsarisingusingtheassumptions applicableforthatmethod.ThemethodunderFAS157requiresthisfeeassessmenttobefixedatthetimeofissue.Asthefeesincludedwithintheinitialfeeassessmentare earned,theyareincludedinnon-operatingprofittomatchthecorrespondingmovementintheguaranteeliability.AstheGroupappliesUSGAAPforthemeasuredvalueofthe productguaranteesthisitemalsoincludesasymmetricimpactswherethemeasurementbasesoftheliabilitiesandassociatedderivativesusedtomanagetheJacksonannuity businessdifferasdescribedinnoteB1.3(c)below.  –Thevariableannuityguaranteesandfixedindexannuityembeddedoptionsbeingonlypartiallyfairvaluedunder‘grandfathered’USGAAPasdescribedinnoteB1.3(c); –Theinterestrateexposurebeingmanagedthroughtheotherthanequity-relatedderivativeprogrammeexplainedinnote(b)below;and –Jackson’smanagementofitseconomicexposuresforanumberofotherfactorsthataretreateddifferentlyintheaccountingframeworkssuchasfuturefeesandassumed Thenetequityhedgeresultthereforeincludessignificantaccountingmismatchesandotherfactorsthatdonotrepresenttheeconomicresult.Theseotherfactorsinclude:           volatilitylevels. 194 Prudential plc AnnualReport2018 www.prudential.co.uk B Earnings performance continued   Thenetequityhedgeresult(netofrelatedDACamortisationinaccordancewiththepolicythatDACisamortisedinlinewithemergenceofmargins)canbesummarisedasfollows: Fairvaluemovementsonequityhedgeinstruments* Accountingvaluemovementsonthevariableandfixedindexannuityguaranteeliabilities† Feeassessmentsnetofclaimpayments Total 2018 £m 2017 £m 299 (894) 537 (58) (1,871) (99) 480 (1,490) *Heldtomanageequityexposuresofthevariableannuityguaranteesandfixedindexannuityoptions. †Theaccountingvaluemovementsonthevariableandfixedindexannuityguaranteeliabilitiesreflecttheimpactofmarketmovementsandchangesineconomicandactuarial assumptions.Actuarialassumptionsincludeconsiderationofpersistency,mortalityandtheexpectedutilisationofcertainfeaturesattachingtovariableannuitycontracts. Assumptionsareupdatedannuallyviaacomparisontoexperienceandafterapplyingexpertjudgementforhowexperiencemaychangeinthefuture.Routineupdatesin 2018reducedprofitbeforetax(afterallowingrelatedchangedtoDACamortisation)by£143million(2017:£382million). (b) Otherthanequity-relatedderivatives    Thefluctuationsforthisitemcomprisetheneteffectof: –Fairvaluemovementsonfree-standing,otherthanequity-relatedderivatives; –FairvaluemovementsontheGuaranteedMinimumIncomeBenefit(GMIB)reinsuranceassetthatarenotmatchedbymovementsintheunderlyingGMIBliability,whichis notfairvaluedasexplainedinnoteB1.3;and   –RelatedamortisationofDAC. Thefree-standing,otherthanequity-relatedderivativesareheldtomanageinterestrateexposuresanddurationswithinthegeneralaccountandthevariableannuity guaranteesandfixedindexannuityembeddedoptionsdescribedinnote(a)above.Accountingmismatchesarisebecauseofdifferencesbetweenthemeasurementbasisand presentationofthederivatives,whicharefairvaluedwithmovementsrecordedintheincomestatement,andtheexposurestheyareintendedtomanage. (c) Short-termfluctuationsrelatedtodebtsecurities (Charges)creditsintheyear: Lossesonsalesofimpairedanddeterioratingbonds Bondwrite-downs Recoveries/reversals Totalcreditsintheyear RiskmarginallowancedeductedfromadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns*  Interest-relatedrealised(losses)gains: Lossesarisingintheyear AmortisationofgainsandlossesarisingincurrentandprioryearstoadjustedIFRSoperatingprofitbased onlonger-terminvestmentreturns  Relatedamortisationofdeferredacquisitioncosts Totalshort-termfluctuationsrelatedtodebtsecurities 2018 £m 2017 £m (4) (4) 19 11 77 88 (8) (116) (124) 5 (31) (3) (2) 10 5 86 91 (43) (140) (183) 19 (73) *ThedebtsecuritiesofJacksonareheldinthegeneralaccountofthebusiness.Realisedgainsandlossesarerecordedintheincomestatementwithnormalisedreturnsincluded inadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnswithvariationsfromyeartoyearincludedintheshort-termfluctuationscategory.Theriskmargin reservechargeforlonger-termcredit-relatedlossesincludedinadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsofJacksonfor2018isbasedonan averageannualriskmarginreserveof18basispoints(2017:21basispoints)onaveragebookvaluesofUS$57.1billion(2017:US$55.3billion)asshownbelow: Moody’s rating category (or equivalent under NAIC ratings of mortgage-backed securities) A3orhigher Baa1,2or3 Ba1,2or3 B1,2or3 BelowB3 Total  Relatedamortisationofdeferredacquisition costs(seebelow) RiskmarginreservechargetoadjustedIFRS operatingprofitforlonger-termcredit- relatedlosses Average book value  US$m 29,982 25,814 1,042 289 11 57,138  2018 2017 Annual expected loss  US$m (31) (55) (10) (8) – (104) Average book value  US$m 27,277 26,626 1,046 318 23 55,290  £m (23) (40) (8) (6) – (77) 22 15 RMR  % 0.12 0.22 1.03 2.70 3.78 0.21 Annual expected loss  US$m (33) (58) (11) (9) (1) (112) 21  £m (25) (45) (8) (7) (1) (86)  15 (82) (62) (91) (71) RMR  % 0.10 0.21 0.98 2.64 3.69 0.18       InadditiontotheaccountingforrealisedgainsandlossesdescribedaboveforJacksongeneralaccountdebtsecurities,includedwithinthestatementofother ConsistentwiththebasisofmeasurementofinsuranceassetsandliabilitiesforJackson’sIFRSresults,thechargesandcreditstoadjustedIFRSoperatingprofitsbasedon longer-terminvestmentreturnsarepartiallyoffsetbyrelatedamortisationofdeferredacquisitioncosts.  comprehensiveincomeisapre-taxchargeof£(1,371)millionfornetunrealisedlossesondebtsecuritiesclassifiedasavailable-for-salenetofrelatedamortisationofdeferred acquisitioncosts(2017:creditof£541million).Temporarymarketvaluemovementsdonotreflectdefaultsorimpairments.Additionaldetailsofthemovementinthevalue oftheJacksonportfolioareincludedinnoteC3.2(b).          (iii) UK and Europe operations  Thepositiveshort-termfluctuationsininvestmentreturnsfortheUKandEuropeoperationsof£34million(2017:negative£14million)mainlyarisesfromunrealisedgainsonequity optionsheldtohedgethevalueoffutureshareholdertransfersfromthewith-profitsfundpartiallyoffsetbylossesoncorporatebondsbackingcapitaltosupporttheremaining annuitybusiness,giventheincreaseininterestratesandcreditspreadsin2018. (iv) Other operations  Thepositiveshort-termfluctuationsininvestmentreturnsforotheroperationsof£20million(2017:positive£20million)includeunrealisedvaluemovementsonfinancial instrumentsheldoutsideofthemainlifeoperations. www.prudential.co.uk AnnualReport2018 Prudential plc 195 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B1 Analysis of performance by segment continued B1.3 Determining operating segments and performance measure of operating segments Operating segments TheGroup’soperatingsegmentsforfinancialreportingaredefinedandpresentedinaccordancewithIFRS8,‘OperatingSegments’, onthebasisofthemanagementreportingstructureanditsfinancialmanagementinformation. UndertheGroup’smanagementandreportingstructureitschiefoperatingdecisionmakeristheGroupExecutiveCommittee(GEC). Inthemanagementstructure,responsibilityisdelegatedtotheChiefExecutiveOfficersofPrudentialCorporationAsia,theNorth AmericanBusinessUnitandM&GPrudentialfortheday-to-daymanagementoftheirbusinessunits(withintheframeworksetoutinthe GroupGovernanceManual).FinancialmanagementinformationusedbytheGECalignswiththesethreebusinesssegments.These operatingsegmentsderiverevenuefrombothlong-terminsuranceandassetmanagementactivities. Operationswhichdonotformpartofanybusinessunitarereportedas‘Unallocatedtoasegment’.TheseincludeGroupHeadOffice andAsiaRegionalHeadOfficecosts.PrudentialCapitalandAfricaoperationsdonotformpartofanyoperatingsegmentunderthe structure,andtheirassetsandliabilitiesandprofitorlossbeforetaxarenotmaterialtotheoverallfinancialpositionoftheGroup. PrudentialCapitalandAfricaoperationsarethereforereportedas‘Unallocatedtoasegment’. Performance measure TheperformancemeasureofoperatingsegmentsutilisedbytheCompanyisadjustedIFRSoperatingprofitattributabletoshareholders basedonlonger-terminvestmentreturns,asdescribedbelow.ThismeasurementbasisdistinguishesadjustedIFRSoperatingprofit basedonlonger-terminvestmentreturnsfromotherconstituentsofthetotalprofitasfollows: — Short-termfluctuationsininvestmentreturnsonshareholder-backedbusiness.Thisincludestheimpactofshort-termmarketeffects onthecarryingvalueofJackson’sguaranteeliabilitiesandrelatedderivativesasexplainedbelow; — Amortisationofacquisitionaccountingadjustmentsarisingonthepurchaseofbusiness.Thiscomprisesprincipallythechargefor theadjustmentsarisingonthepurchaseofREALICin2012;and — Gainorlossoncorporatetransactions,suchasdisposalsundertakenintheyear. Determination of adjusted IFRS operating profit based on longer-term investment returns for investment and liability movements: (a) General principles (i) UK-style with-profits business TheadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsreflectsthestatutorytransfergrossofattributabletax. Valuemovementsintheunderlyingassetsofthewith-profitsfundsdonotaffectdirectlythedeterminationofadjustedIFRSoperating profitbasedonlonger-terminvestmentreturns. (ii) Unit-linked business Thepolicyholderunitliabilitiesaredirectlyreflectiveoftheunderlyingassetvaluemovements.Accordingly,theadjustedIFRSoperating profitbasedonlonger-terminvestmentreturnsreflectthecurrentperiodvaluemovementsinboththeunitliabilitiesandthebackingassets. (iii) US variable annuity and fixed index annuity business ThisbusinesshasguaranteeliabilitieswhicharemeasuredonacombinationoffairvalueandotherUSGAAPderivedprinciples.These liabilitiesaresubjecttoanextensivederivativeprogrammetomanageequityandinterestrateexposureswhosefairvaluemovements passthroughtheincomestatementeachperiod.TheprinciplesfordeterminationoftheadjustedIFRSoperatingprofitbasedon longer-terminvestmentreturnsandshort-termfluctuationsareasdiscussedinsection(c)below. (iv) Business where policyholder liabilities are sensitive to market conditions UnderIFRS,thedegreetowhichthecarryingvaluesofliabilitiestopolicyholdersaresensitivetocurrentmarketconditionsvaries betweenbusinessunitsdependinguponthenatureofthe‘grandfathered’measurementbasis.Ingeneral,inthoseinstanceswherethe liabilitiesareparticularlysensitivetoroutinechangesinmarketconditions,theaccountingbasisissuchthattheimpactofmarket movementsontheassetsandliabilitiesisbroadlyequivalentintheincomestatement,andadjustedIFRSoperatingprofitbasedon longer-terminvestmentreturnsisnotdistorted.Inthesecircumstances,thereisnoneedforthemovementintheliabilitytobebifurcated betweentheelementsthatrelatetolonger-termmarketconditionsandshort-termeffects. However,movementsinliabilitiesforsometypesofbusinessdorequirebifurcationtoensurethatatthenetlevel(ieafterallocated investmentreturnandchargeforpolicyholderbenefits)theadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns reflectslonger-termmarketreturns. ExamplesofwheresuchbifurcationisnecessaryareinHongKongandforUKshareholder-backedannuitybusiness,asexplained insectionsb(i)andd(i),respectively.ForothertypesofAsia’snon-participatingbusiness,expectedlonger-terminvestmentreturns areusedtodeterminethemovementinpolicyholderliabilitiesfordeterminingadjustedIFRSoperatingprofitbasedonlonger-term investmentreturns. 196 Prudential plc AnnualReport2018 www.prudential.co.uk B Earnings performance continued(v) Other shareholder-financed business Forlong-terminsurancebusiness,whereassetsandliabilitiesareheldforthelongterm,theaccountingbasisforinsuranceliabilities undercurrentIFRScanleadtoprofitsthatincludetheeffectsofshort-termfluctuationsinmarketconditions,whichmaynotbe representativeoftrendsinunderlyingperformance.Therefore,thefollowingkeyelementsareappliedtotheresultsoftheGroup’s shareholder-financedbusinessestodetermineadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns. Exceptinthecaseofassetsbackingliabilitieswhicharedirectlymatched(suchasunit-linkedbusiness)orcloselycorrelatedwith valuemovements(asdiscussedbelow)adjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsforshareholder-financed businessisdeterminedonthebasisofexpectedlonger-terminvestmentreturns.Longer-terminvestmentreturnscompriseactual incomereceivablefortheperiod(interest/dividendincome)andforbothdebtandequity-typesecuritieslonger-termcapitalreturns. Debt securities and loans Inprinciple,fordebtsecuritiesandloans,thelonger-termcapitalreturnscomprisetwoelements: — Riskmarginreservebasedchargefortheexpectedlevelofdefaultsfortheperiod,whichisdeterminedbyreferencetothecredit qualityoftheportfolio.Thedifferencebetweenimpairmentlossesinthereportingperiodandtheriskmarginreservechargetothe adjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsisreflectedinshort-termfluctuationsininvestmentreturns; and — Theamortisationofinterest-relatedrealisedgainsandlossestoadjustedIFRSoperatingprofitbasedonlonger-terminvestment returnstothedatewhensoldbondswouldhaveotherwisematured. At31December2018,thelevelofunamortisedinterest-relatedrealisedgainsandlossesrelatedtopreviouslysoldbondsfortheGroup wasanetgainof£629million(2017:£855million). Equity-type securities Forequity-typesecurities,thelonger-termratesofreturnareestimatesofthelong-termtrendinvestmentreturnsforincomeandcapital havingregardtopastperformance,currenttrendsandfutureexpectations.Equity-typesecuritiesheldforshareholder-financed businessesotherthantheUKannuitybusiness,unit-linkedandUSvariableannuityseparateaccountsareprincipallyrelevantforthe USandAsiainsuranceoperations.Differentratesapplytodifferentcategoriesofequity-typesecurities. Derivative value movements Generally,derivativevaluemovementsareexcludedfromadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.The exceptioniswherethederivativevaluemovementsbroadlyoffsetchangesintheaccountingvalueofotherassetsandliabilitiesincluded inadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns.Theprincipalexampleofderivativeswhosevaluemovements areexcludedfromadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsarisesinJackson,asdiscussedbelowin section(c). (b) Asia insurance operations (i) Business where policyholder liabilities are sensitive to market conditions ForcertainAsianon-participatingbusiness,forexampleinHongKong,theeconomicfeaturesaremoreakintoassetmanagement productswithpolicyholderliabilitiesreflectingassetsharesoverthecontractterm.Consequently,fortheseproducts,thechargefor policyholderbenefitsintheadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsreflectstheassetsharefeaturerather thanvolatilemovementsthatwouldotherwisebereflectedifthelocalregulatorybasis(alsoappliedforIFRSbasis)wasused. Forcertainothertypesofnon-participatingbusinessexpectedlonger-terminvestmentreturnsareusedtodeterminethemovement inpolicyholderliabilitiesfordeterminingadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns. (ii) Other Asia shareholder-financed business Debt securities Forthisbusiness,therealisedgainsandlossesareprincipallyinterestrelated.Accordingly,allrealisedgainsandlossestodatefor theseoperationsareamortisedovertheperiodtothedatethosesecuritieswouldotherwisehavematured,withnoexplicitriskmargin reservecharge. Equity-type securities ForAsiainsuranceoperations,investmentsinequitysecuritiesheldfornon-linkedshareholder-backedbusinessamountedto £2,146millionasat31December2018(31December2017:£1,759million).Theratesofreturnappliedin2018rangedfrom5.3percent to17.6percent(2017:4.3percentto17.2percent)withtheratesappliedvaryingbybusinessunit.Theseratesarebroadlystablefrom periodtoperiodbutmaybedifferentbetweencountriesreflecting,forexample,differingexpectationsofinflationineachbusinessunit. Theassumptionsareforthereturnsexpectedtoapplyinequilibriumconditions.Theassumedratesofreturndonotreflectanycyclical variabilityineconomicperformanceandarenotsetbyreferencetoprevailingassetvaluations. Thelonger-terminvestmentreturnsfortheAsiainsurancejointventuresaccountedforusingtheequitymethodaredetermined onasimilarbasisastheotherAsiainsuranceoperationsdescribedabove. www.prudential.co.uk AnnualReport2018 Prudential plc 197 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationB1 Analysis of performance by segment continued B1.3 Determining operating segments and performance measure of operating segments continued (c) US insurance operations (i) Separate account business Forsuchbusinessthepolicyholderunitliabilitiesaredirectlyreflectiveoftheassetvaluemovements.Accordingly,theadjusted IFRSoperatingprofitbasedonlonger-terminvestmentreturnsreflectthecurrentperiodvaluemovementsinunitliabilitiesandthe backingassets. (ii) US variable and fixed index annuity business ThefollowingvaluemovementsforJackson’svariableandfixedindexannuitybusinessareexcludedfromadjustedIFRSoperatingprofit basedonlonger-terminvestmentreturns.SeenoteB1.2note(ii): — Fairvaluemovementsforequity-basedderivatives; — Fairvaluemovementsforguaranteedbenefitoptionsforthe‘notforlife’portionofGuaranteedMinimumWithdrawalBenefit (GMWB)andfixedindexannuitybusiness,andGuaranteedMinimumIncomeBenefit(GMIB)reinsurance(seebelow); — MovementsintheaccountscarryingvalueofGuaranteedMinimumDeathBenefit(GMDB),GMIBandthe‘forlife’portionofGMWB liabilities,(seebelow)forwhich,underthe‘grandfathered’USGAAPappliedunderIFRSforJackson’sinsuranceassetsandliabilities, themeasurementbasisgivesrisetoamutedimpactofcurrentperiodmarketmovements(ietheyarerelativelyinsensitivetotheeffect ofcurrentperiodequitymarketandinterestratechanges); — Aportionofthefeeassessmentsaswellasclaimpayments,inrespectofguaranteeliabilities;and — Relatedamortisationofdeferredacquisitioncostsforeachoftheaboveitems. Guaranteed benefit options for the ‘not for life’ portion of GMWB and equity index options for the fixed index annuity business The‘notforlife’portionofGMWBguaranteedbenefitoptionliabilitiesismeasuredundertheUSGAAPbasisappliedforIFRSina mannerconsistentwithIAS39underwhichtheprojectedfuturegrowthrateoftheaccountbalanceisbasedoncurrentswaprates (ratherthanexpectedratesofreturn)withonlyaportionoftheexpectedfutureguaranteefeesincluded.Reservevaluemovementson theseliabilitiesaresensitivetochangestolevelsofequitymarkets,impliedvolatilityandinterestrates.Theequityindexoptionforfixed indexannuitybusinessismeasuredundertheUSGAAPbasisappliedforIFRSinamannerconsistentwithIAS39underwhichthe projectedfuturegrowthisbasedoncurrentswaprates. Guaranteed benefit option for variable annuity guarantee minimum income benefit TheGMIBliability,whichissubstantiallyreinsured,subjecttoadeductibleandannualclaimlimits,isaccountedforusing‘grandfathered’ USGAAP.Thisaccountingbasissubstantiallydoesnotrecognisetheeffectsofmarketmovements.Thecorrespondingreinsuranceasset ismeasuredunderthe‘grandfathered’USGAAPbasisappliedforIFRSinamannerconsistentwithIAS39,‘FinancialInstruments: RecognitionandMeasurement’,andtheassetisthereforerecognisedatfairvalue.AstheGMIBiseconomicallyreinsured,themarkto marketelementofthereinsuranceassetisincludedasacomponentofshort-termfluctuationsininvestmentreturns. (iii) Other derivative value movements Theprincipalexampleofnon-equitybasedderivatives(forexample,interestrateswapsandswaptions)whosevaluemovementsare excludedfromadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns,arisesinJackson.Non-equitybasedderivatives areprimarilyheldbyJacksonaspartofabroadly-basedhedgingprogrammeforfeaturesofJackson’sbondportfolio(forwhichvalue movementsarebookedinthestatementofothercomprehensiveincomeratherthantheincomestatement),productliabilities(forwhich USGAAPaccountingas‘grandfathered’underIFRS4doesnotfullyreflecttheeconomicfeaturesbeinghedged),andtheinterestrate exposureattachingtoequity-basedproductoptions. 198 Prudential plc AnnualReport2018 www.prudential.co.uk B Earnings performance continued(iv) Other US shareholder-financed business Debt securities Thedistinctionbetweenimpairmentlossesandinterest-relatedrealisedgainsandlossesisofparticularrelevancetoJackson.Jacksonhas usedtheratingsbyNationallyRecognisedStatisticalRatingsOrganisations(NRSRO)orratingsresultingfromtheregulatoryratingsdetail issuedbytheNationalAssociationofInsuranceCommissioners(NAIC)todeterminetheaverageannualriskmarginreservetoapplyto debtsecuritiesheldtobackgeneralaccountbusiness.Debtsecuritiesheldtobackseparateaccountandreinsurancefundswithheldare notsubjecttoriskmarginreservecharge.Furtherdetailsoftheriskmarginreservecharge,aswellastheamortisationofinterest-related realisedgainsandlosses,forJacksonareshowninnoteB1.2note(ii)(c). Equity-type securities Asat31December2018,theequity-typesecuritiesforUSinsurancenon-separateaccountoperationsamountedto£1,359million (31December2017:£946million).Fortheseoperations,thelonger-termratesofreturnforincomeandcapitalappliedintheyears indicated,whichreflectthecombinationoftheaveragerisk-freeratesovertheyearandappropriateriskpremiumsareasfollows: Equity-typesecuritiessuchascommonandpreferredstockandportfolioholdingsinmutualfunds Otherequity-typesecuritiessuchasinvestmentsinlimitedpartnershipsandprivateequityfunds 6.7% to 7.2% 6.1%to6.5% 8.7% to 9.2% 8.1%to8.5% 2018 2017 (d) UK and Europe insurance operations (i) Shareholder-backed annuity business Forthisbusiness,policyholderliabilitiesaredeterminedbyreferencetocurrentinterestrates.Thevaluemovementsoftheassets coveringliabilitiesarecloselycorrelatedwiththerelatedchangeinliabilities.Accordingly,assetvaluemovementsarerecordedwithin the‘adjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns’.Policyholderliabilitiesincludeamarginforcreditrisk. Variationsbetweenactualandbestestimateexpectedimpairmentsarerecordedasacomponentofshort-termfluctuationsin investmentreturns. TheadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsreflectstheimpactofvaluemovementsonpolicyholder liabilitiesforshareholder-backedannuitybusinesswithinThePrudentialAssuranceCompanyLimited(PAC)afteradjustmentstoallocate thefollowingelementsofthemovementtothecategoryof‘short-termfluctuationsininvestmentreturns’: — Theimpactoncreditriskprovisioningofactualupgradesanddowngradesduringtheperiod; — Creditexperiencecomparedwithassumptions;and — Short-termvaluemovementsonassetsbackingthecapitalofthebusiness. Creditexperiencereflectstheimpactofdefaultsandothersimilarexperience,suchasassetexchangesarisingfromdebtrestructuring byissuersthatincludeeffectivelyanelementofpermanentimpairmentofthesecurityheld.Positiveornegativeexperiencecompared withassumptionsisincludedwithinshort-termfluctuationsininvestmentreturnswithoutfurtheradjustment.Theeffectsofother changestocreditriskprovisioningareincludedintheadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns,asisthe neteffectofchangestothevaluationrateofinterestduetoportfoliorebalancingtoalignmorecloselywithmanagementbenchmark. (ii) Non-linked shareholder-financed business Fordebtsecuritiesbackingnon-linkedshareholder-financedbusinessoftheUKandEuropeinsuranceoperations(otherthantheannuity business)therealisedgainsandlossesareprincipallyinterestrelated.Accordingly,allrealisedgainsandlossestodateforthese operationsarebeingamortisedovertheperiodtothedatethosesecuritieswouldotherwisehavematured,withnoexplicitriskmargin reservecharge. (e) Fund management and other non-insurance businesses Forthesebusinesses,theparticularfeaturesapplicableforlifeassurancenotedabovedonotapplyandthereforetheadjustedIFRS operatingprofitbasedonlonger-terminvestmentreturnsisnotdeterminedonthebasisdescribedabove.Instead,realisedgainsand lossesaregenerallyincludedinadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnswithtemporaryunrealisedgains andlossesbeingincludedinshort-termfluctuations.Insomeinstances,realisedgainsandlossesonderivativesandotherfinancial instrumentsareamortisedtoadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsoveratimeperiodthatreflectsthe underlyingeconomicsubstanceofthearrangements. www.prudential.co.uk AnnualReport2018 Prudential plc 199 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationB1 Analysis of performance by segment continued B1.4 Segmental income statement Grosspremiumsearned note (iv) Outwardreinsurancepremiums note (i) Earnedpremiums,netofreinsurance Otherincome note (ii),(iii) Totalexternalrevenue note (v),(vi) Intra-grouprevenue Interestincome note (vii) Otherinvestmentreturnnote B1.5 Totalrevenue,netofreinsurance Benefitsandclaimsandmovementsin unallocatedsurplusofwith-profitsfunds, netofreinsurance note (i),(iv) Acquisitioncostsandotheroperating expenditure note B2, note (iii),(iv) Interestoncorestructuralborrowings Lossondisposalofbusinessesandcorporate transactionsnote D1.1 Totalcharges,netofreinsuranceandloss ondisposalofbusinesses Shareofprofitfromjointventuresandassociates, netofrelatedtax Profit(loss)beforetax(being tax attributable to shareholders’ and policyholders’ returns) note (viii) Tax(charge)creditattributableto policyholders’returns Profit(loss)beforetaxattributable toshareholders Analysis of profit (loss) before tax AdjustedIFRSoperatingprofit(loss)based onlonger-terminvestmentreturns Short-termfluctuationsininvestmentreturns onshareholder-backedbusiness Amortisationofacquisitionaccounting adjustments Lossondisposalofbusinessesandcorporate transactions note D1.1 2018 £m Asia US UK and Europe Total segment 16,469 (575) 15,894 309 16,203 42 1,086 (3,240) 14,091 17,656 (309) 17,347 50 17,397 50 2,016 (6,804) 12,659 13,061 (13,137) (76) 1,595 1,519 3 3,039 (6,476) (1,915) 47,186 (14,021) 33,165 1,954 35,119 95 6,141 (16,520) 24,835 Unallocated to a segment (other operations) note(ix) 38 (2) 36 39 75 (95) 51 65 96 Group total 47,224 (14,023) 33,201 1,993 35,194 – 6,192 (16,455) 24,931 (8,736) (8,790) 4,977 (12,549) (19) (12,568) (3,866) – (2,077) (15) (2,360) – (8,303) (15) (11) (38) – (49) (552) (395) (31) (8,855) (410) (80) (12,613) (10,920) 2,617 (20,916) (997) (21,913) 239 – 1,717 1,739 (80) – 52 754 406 291 – 291 4,210 (901) 3,309 326 – 326 1,637 1,739 1,160 4,536 (901) 3,635 2,164 1,919 1,634 5,717 (890) 4,827 (512) (100) (4) (11) (42) (38) 1,637 1,739 34 – (508) 1,160 (578) (46) (557) 4,536 20 – (31) (901) (558) (46) (588) 3,635 200 Prudential plc AnnualReport2018 www.prudential.co.uk B Earnings performance continuedGrosspremiumsearned Outwardreinsurancepremiums Earnedpremiums,netofreinsurance Otherincome note (ii),(iii) Totalexternalrevenue note (v),(vi) Intra-grouprevenue Interestincome note (vii) Otherinvestmentreturnnote B1.5 Totalrevenue,netofreinsurance Benefitsandclaimsandmovementsin unallocatedsurplusofwith-profitsfunds, netofreinsurance Acquisitioncostsandotheroperating expenditurenote B2, note(iii) Interestoncorestructuralborrowings Gainondisposalofbusinessesandcorporate transactionsnote D1.1 Re-measurementofthesoldKorealifebusiness Totalcharges,netofreinsuranceandgain ondisposalofbusiness Shareofprofitfromjointventuresandassociates, netofrelatedtax Profit(loss)beforetax(being tax attributable to shareholders’ and policyholders’ returns) note (viii) Taxchargeattributabletopolicyholders’returns Profit(loss)beforetaxattributable toshareholders Analysis of profit (loss) before tax AdjustedIFRSoperatingprofit(loss)based onlonger-terminvestmentreturns Short-termfluctuationsininvestmentreturns onshareholder-backedbusiness Amortisationofacquisitionaccounting adjustments Gainondisposalofbusinessesandcorporate transactionsnote D1.1 2017 £m Asia US UK and Europe Total segment 15,688 (656) 15,032 307 15,339 40 932 8,063 24,374 15,164 (352) 14,812 669 15,481 64 2,085 16,448 34,078 13,126 (1,050) 12,076 1,234 13,310 5 3,413 11,171 27,899 43,978 (2,058) 41,920 2,210 44,130 109 6,430 35,682 86,351 Unallocated to a segment (other operations) note(ix) 27 (4) 23 48 71 (109) 67 10 39 Group total 44,005 (2,062) 41,943 2,258 44,201 – 6,497 35,692 86,390 (18,291) (31,205) (23,025) (72,521) (11) (72,532) (4,053) – (2,257) (16) (3,206) – (9,516) (16) (477) (409) (9,993) (425) 61 5 162 – – – 223 5 – – 223 5 (22,278) (33,316) (26,231) (81,825) (897) (82,722) 181 2,277 (249) 2,028 – 762 – 762 121 302 – 302 1,789 (425) 4,828 (674) (858) – 3,970 (674) 1,364 4,154 (858) 3,296 1,975 2,224 1,378 5,577 (878) 4,699 (1) (7) 61 2,028 (1,568) (14) (1,583) (56) 162 762 – – 1,364 (63) 223 4,154 20 – – (858) (1,563) (63) 223 3,296 Notes (i) (ii) (iii) (iv) (v) (vi) Outwardreinsurancepremiumsof£(14,023)millionincludesthe£(12,149)millionpaidduringtheyearinrespectofthereinsuranceoftheUKannuityportfolio.Theassociated increaseinreinsuranceassetsisincludedinoutwardreinsurers’shareofbenefitsandclaimsandtheconsequentialchangeinpolicyholderliabilitiesisincludedinbenefitsand claims.SeenoteD1.1forfurtherdetails. IncludedwithinotherincomeisrevenuefromtheGroup’sassetmanagementbusinessof£1,489million(2017:£1,371million).Theremainingotherincomeincludesrevenuefrom externalcustomers.Otherincomealsoincludes£20million(2017:£7million)relatingtofinancialinstrumentsthatarenotheldatfairvaluethroughprofitorloss.The2017 comparativealsoincludedamountsforbroker-dealerfeesgeneratedbytheUSbroker-dealernetworkwhichwasdisposedofinAugust2017,amountingto£542million. FollowingtheadoptionofIFRS15,the2017comparativeresultshavebeenre-presentedasdescribedinnoteA2. InOctober2018,Jacksonenteredintoa100percentreinsuranceagreementwithJohnHancockLifeInsuranceCompany(JohnHancockUSA)toacquireaclosedblockofgroup payoutannuitybusiness.Thetransactionresultedinanadditiontogrosspremiumsearnedof£3.7billionandacorrespondingincreaseinbenefitsandclaimsof£4.1billionforthe increaseinpolicyholderliabilitiesandadecreaseinotheroperatingexpenditurefornegativecedingcommissionsof£0.4billionattheinceptionofthecontract.Therewasno materialimpactonadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsortotalprofitasaresultofthetransaction. InAsia,externalrevenuefromnooneindividualmarketexceeds10percentoftheGrouptotalexceptforHongKonginboth2018and2017.TotalexternalrevenueofHongKongis £7,719million(2017:£7,269million). Totalexternalrevenueshowninthetablesaboveisallfromexternalcustomersexceptfor£166millionwithinthe2018amountforUKandEuropeof£1,519million.The£166million representstheinsurancerecoveriesrecognisedinrespectofcostsassociatedwiththereviewofpastannuitysalesasdescribedfurtherinnoteC11. Interestincomeincludes£4million(2017:£3million)accruedinrespectofimpairedsecurities. (vii) (viii) Thismeasureistheformalprofit(loss)beforetaxmeasureunderIFRSbutisnottheresultattributabletoshareholders. (ix) Unallocatedtoasegmentincludescentraloperations(GroupandAsiaRegionalHeadOfficesandGroupborrowings),PrudentialCapitalandAfricaoperations.Inaddition, thiscolumnincludesintra-groupeliminations,includingtheeliminationoftheintra-groupreinsurancecontractbetweentheUKwith-profitsandAsiawith-profitsbusinesses. (x) DuetothenatureofthebusinessoftheGroup,thereisnorelianceonanymajorcustomers. www.prudential.co.uk AnnualReport2018 Prudential plc 201 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationB1 Analysis of performance by segment continued B1.5 Other investment return Realisedandunrealised(losses)gainsonsecuritiesatfairvaluethroughprofitorloss Realisedandunrealised(losses)onderivativesatfairvaluethroughprofitorloss Realisedgains(losses)onavailable-for-salesecurities,previouslyrecognisedinother comprehensiveincome* Realised(losses)gainsonloans Dividends Otherinvestmentincome Otherinvestmentreturn *Includingimpairment. 2018 £m 2017 £m (19,665) (941) 33,121 (1,624) 11 (4) 2,362 1,782 (26) 9 2,654 1,558 (16,455) 35,692 RealisedgainsandlossesontheGroup’sinvestmentsfor2018recognisedintheincomestatementamountedtoanetgainof£8.2billion (2017:anetgainof£5.7billion). B1.6 Additional analysis of performance by segment components B1.6(a) Asia Earnedpremiums,netofreinsurance Otherincome Totalexternalrevenue Intra-grouprevenue Interestincome Otherinvestmentreturn Totalrevenue,netofreinsurance Benefitsandclaimsandmovementsinunallocatedsurplus ofwith-profitsfunds,netofreinsurance Acquisitioncostsandotherexpenditurenote B2 (Loss)gainondisposalofbusinessesandcorporate transactionsnote D1.1 RemeasurementofthesoldKorealifebusinessnote D1.1 Totalcharges,netofreinsuranceand(loss)gainondisposal 2018 £m Insurance Asset management Eliminations 15,894 99 15,993 – 1,083 (3,240) 13,836 (8,736) (3,732) (11) – – 210 210 158 3 – 371 – (250) – – – – – (116) – – (116) – 116 – – 2017 £m Total 15,032 307 15,339 40 932 8,063 24,374 Total 15,894 309 16,203 42 1,086 (3,240) 14,091 (8,736) (3,866) (18,291) (4,053) (11) – 61 5 ofbusinesses (12,479) (250) 116 (12,613) (22,278) Shareofprofitfromjointventuresandassociates, netofrelatedtax Profitbeforetax(beingtaxattributabletoshareholders’ andpolicyholders’returns) Taxchargeattributabletopolicyholders’returns Profitbeforetaxattributabletoshareholders Analysis of profit (loss) before tax AdjustedIFRSoperatingprofitbasedonlonger-term investmentreturns Short-termfluctuationsininvestmentreturnson shareholder-backedbusiness Amortisationofacquisitionaccountingadjustments (Loss)gainondisposalofbusinessesandcorporate transactionsnote D1.1 178 1,535 (80) 1,455 61 182 – 182 1,982 182 (512) (4) (11) 1,455 – – – 182 – – – – – – – – – 239 181 1,717 (80) 1,637 2,277 (249) 2,028 2,164 1,975 (512) (4) (11) 1,637 (1) (7) 61 2,028 202 Prudential plc AnnualReport2018 www.prudential.co.uk B Earnings performance continuedB1.6(b) US Earnedpremiums,netofreinsurance note (ii) Otherincome Totalexternalrevenue Intra-grouprevenue Interestincome Otherinvestmentreturn Totalrevenue,netofreinsurance Benefitsandclaims note (ii) Interestoncorestructuralborrowings Acquisitioncostsandotheroperatingexpenditurenote B2 (Loss)gainondisposalofbusinessesandcorporate transactionsnote D1.1 Totalcharges,netofreinsuranceandgainondisposal ofbusinesses Profitbeforetax Analysis of profit (loss) before tax AdjustedIFRSoperatingprofitbasedonlonger-term investmentreturns Short-termfluctuationsininvestmentreturns onshareholder-backedbusiness Amortisationofacquisitionaccountingadjustments (Loss)gainondisposalofbusinessesandcorporate transactionsnote D1.1 2018 £m 2017 £m Insurance Asset management note(i) Eliminations Total Total 17,347 5 17,352 – 2,016 (6,784) 12,584 (8,790) (15) (2,010) – (10,815) 1,769 1,911 (100) (42) – 1,769 – 45 45 118 – (20) 143 – – (135) (38) (173) (30) 8 – – (38) (30) – – – (68) – – (68) – – 68 – 68 – – – – – – 17,347 50 17,397 50 2,016 (6,804) 12,659 (8,790) (15) (2,077) 14,812 669 15,481 64 2,085 16,448 34,078 (31,205) (16) (2,257) (38) 162 (10,920) (33,316) 1,739 762 1,919 2,224 (100) (42) (38) 1,739 (1,568) (56) 162 762 Notes (i) (ii) In2017,theUStotalrevenueandtotalchargesincludedNPHbrokerdealerfeesof£542millionwithinotherincomeandotheroperatingexpenditure,respectively.TheGroup disposedofitsUSindependentbroker-dealernetworkinAugust2017. InOctober2018,JacksonenteredintoanagreementwithJohnHancockLifetoreinsure100percentofthegrouppayoutannuitybusiness.Thetransactionresultedinanaddition togrosspremiumsearnedof£3.7billionandacorrespondingincreaseinbenefitsandclaimsof£4.1billionfortheincreaseinpolicyholderliabilitiesandadecreaseinother operatingexpenditurefornegativecedingcommissionsof£0.4billionattheinceptionofthecontract.TherewasnomaterialimpactonadjustedIFRSoperatingprofitbasedon longer-terminvestmentreturnsortotalprofitasaresultofthetransaction. www.prudential.co.uk AnnualReport2018 Prudential plc 203 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationB1 Analysis of performance by segment continued B1.6 Additional analysis of performance by segment components continued B1.6(c) UK and Europe Earnedpremiums,netofreinsurance note (iii) Otherincome note (ii) Totalexternalrevenue Intra-grouprevenue Interestincome Otherinvestmentreturn Totalrevenue,netofreinsurance Benefitsandclaimsandmovementsinunallocatedsurplus ofwith-profitsfunds,netofreinsurance note (iii) Acquisitioncostsandotheroperatingexpenditure note (ii), note B2 Totalcharges,netofreinsurance Shareofprofitfromjointventuresandassociates, netofrelatedtax Profitbeforetax(beingtaxattributabletoshareholders’ andpolicyholders’returns) Taxcredit(charge)attributabletopolicyholders’returns Profitbeforetax Analysis of profit (loss) before tax AdjustedIFRSoperatingprofitbasedonlonger-term investmentreturns Short-termfluctuationsininvestmentreturnson shareholder-backedbusiness Lossondisposalofbusinessesandcorporate transactionsnote D1.1 2018 £m 2017 £m Insurance Asset management note(i) Eliminations Total Total (76) 347 271 – 3,038 (6,459) (3,150) 4,977 (1,571) 3,406 36 292 406 698 1,157 49 (508) 698 – 1,248 1,248 167 1 (17) 1,399 – (953) (953) 16 462 – 462 477 (15) – 462 – – – (164) – – (164) – 164 164 – – – – – – – – (76) 1,595 1,519 3 3,039 (6,476) (1,915) 4,977 (2,360) 2,617 12,076 1,234 13,310 5 3,413 11,171 27,899 (23,025) (3,206) (26,231) 52 121 754 406 1,160 1,789 (425) 1,364 1,634 1,378 34 (14) (508) 1,160 – 1,364 Notes (i) (ii) (iii) TherevenueforUKandEuropeassetmanagementof£1,102million(2017:£1,087million),comprisingtheamountsforassetmanagementfeeincome,investmentreturnand otherincomeandperformance-relatedfeesshowninnoteB1.1(v),isdifferenttotheamountof£1,399millionshowninthetableabove.Thisisbecausethe£1,102million (2017:£1,087million)isafterdeductingcommissionswhichwouldhavebeenincludedaschargesinthetableabove.Thedifferenceinthepresentationofcommissionisaligned withhowmanagementreviewsthebusiness.ForfurtherinformationseenoteB1.1. FollowingtheadoptionofIFRS15,the2017comparativeresultshavebeenre-presentedasdescribedinnoteA2. Earnedpremiumsnetofreinsuranceincludesoutwardreinsurancepremiumsof£(12,149)millionpaidduringtheyearinrespectofthereinsuranceoftheUKannuityportfolio. Theassociatedincreaseinreinsuranceassetsisincludedinoutwardreinsurers’shareofbenefitsandclaimsandtheconsequentialchangeinpolicyholderliabilitiesisincludedin benefitsandclaims.SeenoteD1.1forfurtherdetails. 204 Prudential plc AnnualReport2018 www.prudential.co.uk B Earnings performance continuedB2 Acquisition costs and other expenditure Acquisitioncostsincurredforinsurancepolicies Acquisitioncostsdeferredlessamortisationofacquisitioncosts Administrationcostsandotherexpenditure* Movementsinamountsattributabletoexternalunitholdersofconsolidatedinvestmentfunds Totalacquisitioncostsandotherexpenditure 2018 £m 2017 £m (3,438) 59 (5,380) (96) (8,855) (3,712) 911 (6,208) (984) (9,993) *FollowingtheadoptionofIFRS15,the2017comparativeresultshavebeenre-presentedasdescribedinnoteA2.The2018administrationcostsandotherexpenditureincludesacredit of£0.4billionforthenegativecedingcommissionsarisingfromthegrouppayoutannuitybusinessreinsuranceagreemententeredintobyJacksonwithJohnHancockLifeduringtheyear. Totalacquisitioncostsandotherexpenditureincludes: (a)Totaldepreciationandamortisationexpenseof£(1,136)million(2017:£(288)million)isincludedin‘Administrationcostsandother expenditure’and‘Acquisitioncostsdeferredlessamortisationofacquisitioncosts’andrelatesprimarilytoamortisationofdeferred acquisitioncostsofinsurancecontractsandassetmanagementcontracts. (b)Thechargefornon-deferredacquisitioncostsandtheamortisationofthosecoststhatwerepreviouslydeferredwas£(3,379)million (2017:£(2,801)million).Theseamountscomprise£(3,367)millionand£(12)millionforinsuranceandinvestmentcontracts respectively(2017:£(2,772)millionand£(29)millionrespectively). (c)MovementsinamountsattributabletoexternalunitholdersareinrespectofthoseOEICsandunittrustswhicharerequiredtobe consolidatedandcompriseacreditof£201million(2017:chargeof£(719)million)fortheUKandEuropeinsuranceoperationsand achargeof£(297)million(2017:£(265)million)forAsiainsuranceoperations. (d)Allfeeexpensesrelatingtofinancialliabilitiesheldatamortisedcostin2018and2017arepartofthedeterminationoftheeffective interestrateandareincludedin‘Administrationcostsandotherexpenditure’above. (e)Thesegmentalanalysisofinterestexpense(otherthaninterestexpenseincorestructuralborrowings)anddepreciationand amortisationincludedwithintotalacquisitioncostsandotherexpenditurewasasfollows: Asiaoperations: Insurance Assetmanagement USoperations: Insurance Assetmanagement UKandEuropeoperations: Insurance Assetmanagement Totalsegment Unallocatedtoasegment(otheroperations) Group total Other interest expense Depreciation and amortisation 2018 £m 2017 £m 2018 £m 2017 £m – – (159) – (94) – (253) (29) (282) – – (116) – (85) – (201) (39) (240) (228) (4) (830) (6) (61) (5) (1,134) (2) (1,136) (230) (3) 20 (7) (59) (7) (286) (2) (288) B2.1 Staff and employment costs TheaveragenumberofstaffemployedbytheGroupduringtheyearsshownwas: Asiaoperations USoperations UKandEuropeoperations* Total *TheUKandEuropestaffnumbersincludestafffromcentraloperationsandAfricawhichareunallocatedtoasegment. 2018 16,798 4,285 7,123 28,206 2017 15,477 4,564 7,110 27,151 www.prudential.co.uk AnnualReport2018 Prudential plc 205 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information B2 Acquisition costs and other expenditure continued B2.1 Staff and employment costs continued Thecostsofemploymentwere: Wagesandsalaries Socialsecuritycosts Definedbenefitschemes* Definedcontributionschemes Total *The(credit)incorporatestheeffectofactuarialgainsandlosses. 2018 £m 2017 £m 1,656 116 (29) 95 1,838 1,774 129 (3) 85 1,985 B2.2 Share-based payment (a) Description of the plans TheGroupoperatesanumberofshareawardandshareoptionplansthatprovidesPrudentialplcshares,orADRs,toparticipantsupon vesting.TheplansinoperationincludethePrudentialLongTermIncentivePlan(PLTIP),AnnualIncentivePlan(AIP),savings-related shareoptionschemes,sharepurchaseplansanddeferredbonusplans.SomeoftheseplansareparticipatedinbyExecutiveDirectors, thedetailsofwhicharedescribedintheDirectors’remunerationreport.Inaddition,thefollowinginformationisprovided. Share scheme Description Prudential Corporation Asia Long-Term Incentive Plan (PCA LTIP) ThePCALTIPprovideseligibleemployeeswithconditionalawards.Awardsarediscretionaryandona year-by-yearbasisdeterminedbyPrudential’sfullyearfinancialresultsandtheemployee’scontributionto thebusiness.Awardsvestafterthreeyearssubjecttotheemployeebeinginemployment.Vestingofawards mayalsobesubjecttoperformanceconditions.AllawardsaremadeinPrudentialshares,orADRs,except forcountrieswhereshareawardsarenotfeasibleduetosecuritiesand/ortaxreasons,whereawardswillbe replacedbythecashvalueofthesharesthatwouldotherwisehavevested. Prudential Agency Long-Term Incentive Plan CertainagentsinAsiaareeligibletobegrantedawardsunderthePrudentialAgencyLong-TermIncentivePlan. TheseawardsarestructuredinasimilarwaytothePCALTIPdescribedabove. Restricted Share Plan (RSP) TheCompanyoperatestheRSPforcertainemployees.Awardsunderthisplanarediscretionary,andthevesting ofawardsmaybesubjecttoperformanceconditions.AllawardsaremadeinPrudentialsharesorADRs. Deferred bonus plans Savings-related share option schemes Share purchase plans TheCompanyoperatesanumberofdeferredbonusschemesincludingtheGroupDeferredBonusPlan(GDBP), thePrudentialCorporationAsiaDeferredBonusPlan(PCADBP),thePrudentialCapitalDeferredBonusPlan (PruCapDBP)andotherarrangements.Therearenoperformanceconditionsattachedtodeferredshareawards madeunderthesearrangements. EmployeesandeligibleagentsinanumberofgeographiesareeligibleforplanssimilartotheHMRC-approved SaveAsYouEarn(SAYE)shareoptionschemeintheUK.EligibleemployeesparticipateintheInternational Savings-RelatedShareOptionSchemewhileeligibleagentsbasedincertainregionsofAsiacanparticipate intheInternationalSavings-RelatedShareOptionSchemeforNon-Employees. EligibleemployeesoutsidetheUKareinvitedtoparticipateinarrangementssimilartotheCompany’s HMRC-approvedUKSIP,whichallowsthepurchaseofPrudentialplcshares.StaffbasedinIrelandareeligible toparticipateintheShareParticipationPlan.StaffbasedinAsiaareeligibletoparticipateinthePrudential CorporationAsiaAllEmployeeSharePurchasePlan. 206 Prudential plc AnnualReport2018 www.prudential.co.uk B Earnings performance continued (b) Outstanding options and awards ThefollowingtableshowsmovementinoutstandingoptionsandawardsundertheGroup’sshare-basedcompensationplans at31December: Options outstanding under SAYE schemes Awards outstanding under incentive plans 2018 2017 2018 2017 Number of options  millions Weighted average exercise price £ Number of options  millions Weighted average exercise price £ Number of awards millions 6.4 0.3 (1.4) (0.1) (0.2) (0.1) 4.9 0.8 11.74 13.94 10.85 12.25 12.43 12.60 12.10 10.37 7.1 1.4 (1.7) (0.1) (0.2) (0.1) 6.4 0.4 10.74 14.55 10.07 10.83 11.19 10.86 11.74 11.06 33.6 10.7 (8.7) (2.6) – (0.2) 32.8 30.2 12.7 (7.3) (1.3) (0.1) (0.6) 33.6 Beginningofyear Granted Exercised Forfeited Cancelled Lapsed/Expired Endofyear Optionsimmediatelyexercisable,endofyear TheweightedaveragesharepriceofPrudentialplcfortheyearended31December2018was£17.36comparedto£17.51forthe yearended31December2017. ThefollowingtableprovidesasummaryoftherangeofexercisepricesforPrudentialplcoptionsoutstandingat31December: Number outstanding (millions) Outstanding Weighted average remaining contractual life (years)* Exercisable Weighted average exercise prices £ Number exercisable (millions) Weighted average exercise prices £ 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 – 0.3 3.0 0.3 1.3 4.9 – 0.5 4.5 – 1.4 6.4 – 0.4 1.6 4.1 2.6 2.1 0.4 1.4 2.2 – 3.9 2.5 – 9.01 11.19 13.94 14.55 12.10 6.29 9.01 11.21 – 14.55 11.74 – 0.3 0.5 – – 0.8 – – 0.4 – – 0.4 – 9.01 11.11 – – 10.37 6.29 – 11.55 – – 11.06 Between£6and£7 Between£9and£10 Between£11and£12 Between£13and£14 Between£14and£15 *Theyearsshownaboveforweightedaverageremainingcontractuallifeincludethetimeperiodfromendofvestingperiodtoexpirationofcontract. (c) Fair value of options and awards Thefairvalueamountsestimatedonthedateofgrantrelatingtoalloptionsandawardsweredeterminedbyusingthefollowing assumptions: Dividendyield(%) Expectedvolatility(%) Risk-freeinterestrate(%) Expectedoptionlife(years) Weightedaverageexerciseprice(£) Weightedaveragesharepriceatgrantdate(£) Weightedaveragefairvalueatgrantdate(£) 2018 2017 Prudential LTIP (TSR) SAYE options Other awards Prudential LTIP/RSP (TSR) SAYE options – 24.03 1.19 – – 17.46 6.64 2.52 21.09 0.97 3.94 13.94 16.64 3.29 – – – – – – 17.04 – 23.17 0.62 – – 16.80 8.30 2.85 20.15 0.56 3.49 14.55 17.74 3.29 Other awards – – – – – – 16.12 www.prudential.co.uk AnnualReport2018 Prudential plc 207 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationB2 Acquisition costs and other expenditure continued B2.2 Share-based payment continued Thecompensationcostsforallawardsandoptionsarerecognisedinnetincomeovertheplans’respectivevestingperiods.TheGroup usestheBlack-ScholesmodeltovaluealloptionsandawardsotherthanthosewhichhaveTSRperformanceconditionsattached (somePrudentialLTIPandRSPawards)forwhichtheGroupusesaMonteCarlomodelinordertoallowfortheimpactofthese conditions.Thesemodelsareusedtocalculatefairvaluesforshareoptionsandawardsatthegrantdatebasedonthequotedmarket priceofthestockatthemeasurementdate,theamount,ifany,thattheemployeesarerequiredtopay,thedividendyield,expected volatility,risk-freeinterestratesandexerciseprices. Foralloptionsandawards,theexpectedvolatilityisbasedonthemarketimpliedvolatilitiesasquotedonBloomberg.ThePrudential specificat-the-moneyimpliedvolatilitiesareadjustedtoallowforthedifferenttermsanddiscountedexercisepriceonSAYEoptions byusinginformationonthevolatilitysurfaceoftheFTSE100. Risk-freeinterestratesaretakenfromgovernmentbondspotrateswithprojectionsfortwo-year,three-yearandfive-yeartermstomatch correspondingvestingperiods.Dividendyieldsaredeterminedastheaverageyieldoveraperiodof12monthsuptoandincludingthe dateofgrant.ForawardswithaTSRcondition,volatilitiesandcorrelationsbetweenPrudentialandabasketof15competitorcompaniesis required.Forgrantsin2018,theaveragevolatilityforthebasketofcompetitorswas21.32percent.Correlationsforthebasketarecalculated foreachpairingfromthelogofdailyTSRreturnsforthethreeyearspriortothevaluationdate.Marketimpliedvolatilitiesareusedforboth Prudentialandthebasketofcompetitors.Changestothesubjectiveinputassumptionscouldmateriallyaffectthefairvalueestimate. (d) Share-based payment expense charged to the income statement Totalexpenserecognisedintheyearintheconsolidatedfinancialstatementsrelatingtoshare-basedcompensationisasfollows: Share-basedcompensationexpense Amountaccountedforasequity-settled 2018 £m 2017 £m 143 143 158 158 TheGrouphasnoliabilitiesoutstandingattheyearendrelatingtoawardswhicharesettledincash. B2.3 Key management remuneration KeymanagementconstitutestheDirectorsofPrudentialplcastheyhaveauthorityandresponsibilityforplanning,directingand controllingtheactivitiesoftheGroup. Totalkeymanagementremunerationisanalysedinthefollowingtable: Salariesandshort-termbenefits Post-employmentbenefits Share-basedpayments 2018 £m 2017 £m 16.2 1.3 14.5 32.0 17.9 1.3 14.1 33.3 Theshare-basedpaymentschargecomprises£9.7million(2017:£8.3million),whichisdeterminedinaccordancewithIFRS2, ‘Share-basedPayment’(seenoteB2.2)and£4.8million(2017:£5.8million)ofdeferredshareawards. TotalkeymanagementremunerationincludestotalDirectors’remunerationof£31.8million(2017:£40.2million)lessLTIPreleases of£9.5million(2017:£15.2million)asshownintheDirectors’remunerationtableandrelatedfootnotesintheDirectors’remuneration report.FurtherinformationonDirectors’remunerationisgivenintheDirectors’remunerationreport. B2.4 Fees payable to the auditor FeespayabletotheCompany’sauditorfortheauditoftheCompany’sannualaccounts FeespayabletotheCompany’sauditoranditsassociatesforotherservices: Auditofsubsidiariespursuanttolegislation Audit-relatedassuranceservices* Otherassuranceservices Servicesrelatingtocorporatefinancetransactions Allotherservices Totalfeespaidtotheauditor *Oftheaudit-relatedassuranceservicefeesof£4.7millionin2018,£1.4millionrelatestoservicesthatarerequiredbylaw. Inaddition,therewerefeesincurredbypensionschemesof£0.2million(2017:£0.1million)forauditservices. 2018 £m 2017 £m 2.1 9.2 4.7 1.1 0.2 1.0 2.1 8.3 4.3 1.5 0.4 0.7 18.3 17.3 208 Prudential plc AnnualReport2018 www.prudential.co.uk B Earnings performance continuedB3 Effect of changes and other accounting matters on insurance assets and liabilities Thefollowingmattersarerelevanttothedeterminationofthe2018results: (i) Asia insurance operations In2018,theadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsforAsiainsuranceoperationsincludedanetcreditof £94million(2017:£75million)representingasmallnumberofitemsthatarenotexpectedtoreoccur,includingthenon-recurringimpact ofarefinementtotherun-offoftheallowanceforprudencewithintechnicalprovisionswithinSingapore. (ii) US insurance operations Changesinthepolicyholderliabilitiesheldforvariableandfixedindexannuityguaranteesarereportedaspartofnon-operatingprofit andareasdescribedinnoteB1.2. (iii) UK and Europe insurance operations Annuity and other shareholder-backed business Allowance for credit risk ForIFRSreporting,theresultsforUKshareholder-backedannuitybusinessareparticularlysensitivetotheallowancemadeforcreditrisk. Theallowanceisreflectedinthedeductionfromthevaluationrateofinterestfordiscountingprojectedfutureannuitypayments topolicyholdersthatwouldhaveotherwiseapplied.Thecreditriskallowancecomprisesanamountforlong-termbestestimatedefaults andadditionalprovisionsforcreditriskpremium,thecostofdowngradesandshort-termdefaults. TheIFRScreditriskallowancemadefortheUKshareholder-backedfixedandlinkedannuitybusinessequatedto40basispointsat 31December2018(31December2017:42basispoints).Theallowancerepresented22percentofthebondspreadoverswaprates (31December2017:28percent). Thereservesforcreditriskallowanceat31December2018fortheUKshareholder-backedbusinesswere£0.9billion(31December 2017:£1.6billion).The2018creditriskallowanceinformationisafterreflectingtheimpactofthereinsuranceof£12.0billionoftheUK shareholder-backedannuityportfoliotoRothesayLifeenteredintoinMarch2018.SeenoteD1.1forfurtherdetails. Other assumption changes Fortheshareholder-backedbusiness,inadditiontothemovementinthecreditriskallowancediscussedabove,theneteffectofroutine changestoassumptionsin2018wasacreditof£437million(2017:creditof£173million).Thisincluded,amongotheritems,abenefitto adjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsof£441million(2017:£204million),relatingtochangesto annuitantmortalityassumptionstoreflectcurrentmortalityexperience,whichhasshownaslowdowninlifeexpectancyimprovements inrecentperiods,andtheadoptionoftheContinuousMortalityInvestigation(CMI)2016model(2017:adoptionof2015model).Further informationonchangestomortalityassumptionsisgiveninnoteC4.1(d). Longevity reinsurance and other management actions AsidefromtheaforementionedreinsuranceagreementwithRothesayLife,nonewlongevityreinsurancetransactionswereundertaken in2018(2017:longevityreinsurancetransactionscovering£0.6billionofIFRSannuityliabilitiescontributed£31milliontoprofit).Other managementactionsgeneratedprofitsof£58million(2017:£245million). With-profits sub-fund Forthewith-profitssub-fund,theaggregateeffectofassumptionandothernon-recurringchangesin2018wasanetgaintounallocated surplusof£394million(2017:netchargeof£58million)includingtheeffectofmortalityassumptionchanges. www.prudential.co.uk AnnualReport2018 Prudential plc 209 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationB4 Tax charge (a) Total tax charge by nature of expense Thetotaltaxchargeintheincomestatementisasfollows: Tax charge Attributabletoshareholders: Asiaoperations USoperations UKandEurope Otheroperations Taxchargeattributabletoshareholders’returns Attributabletopolicyholders: Asiaoperations UKandEurope Tax(charge)creditattributabletopolicyholders’returns Total tax charge 2018 £m 2017 £m Current tax Deferred tax Total Total (199) (87) (255) 125 (416) (92) (188) (280) (696) (78) (168) 39 1 (206) 12 594 606 400 (277) (255) (216) 126 (622) (80) 406 326 (296) (253) (508) (267) 122 (906) (249) (425) (674) (1,580) Theprincipalreasonforthedecreaseinthetaxchargeattributabletoshareholders’returnsistheinclusionin2017ofa£445million deferredtaxchargearisingontheremeasurementoftheUSnetdeferredtaxassetsfrom35percentto21percentfollowingthe enactmentoftheUStaxreformpackage,theTaxCutsandJobsAct.Themovementfromachargeof£674milliontoacreditof £326millioninthetaxchargeattributabletopolicyholders’returnsmainlyreflectsadecreaseinthedeferredtaxliabilitiesonunrealised gainsoninvestmentsinthewith-profitsfundsoftheUKandEuropeandofAsiacomparedto2017. Thereconciliationoftheexpectedtoactualtaxchargeattributabletoshareholdersisprovidedin(b)below.Thetaxcreditattributable topolicyholdersof£326millionaboveisequaltothelossbeforetaxattributabletopolicyholdersof£326million.Thisistheresultof accountingforpolicyholderincomeafterthedeductionofexpensesandmovementonunallocatedsurplusesandonanafter-taxbasis. Thetotaltaxchargecomprises: Currenttaxexpense: Corporationtax Adjustmentsinrespectofprioryears Totalcurrenttaxcharge  Deferredtaxarisingfrom: Originationandreversaloftemporarydifferences Impactofchangesinlocalstatutorytaxrates Creditinrespectofapreviouslyunrecognisedtaxloss,taxcreditortemporarydifference fromapriorperiod Totaldeferredtaxcredit(charge) Totaltaxcharge 2018 £m 2017 £m (677) (19) (696) 385 8 7 400 (296) (746) 50 (696) (531) (353) – (884) (1,580) Thecurrenttaxchargeof£696million(2017:£696million)includes£65million(2017:£59million)inrespectofthetaxchargeforthe HongKongoperation.TheHongKongcurrenttaxchargeiscalculatedas16.5percentforbothyearsoneither(i)5percentofthenet insurancepremiumor(ii)theestimatedassessableprofits,dependingonthenatureofthebusinesswritten. Thetotaldeferredtaxchargearisesasfollows: Unrealisedgainsandlossesoninvestments Short-termtemporarydifferences Balancesrelatingtoinvestmentandinsurancecontracts Unusedtaxlosses Capitalallowances Deferredtaxcredit(charge) 2018 £m 2017 £m 667 (198) (91) 23 (1) 400 (185) (526) (156) (12) (5) (884) 210 Prudential plc AnnualReport2018 www.prudential.co.uk B Earnings performance continuedThemovementinunrealisedgainsandlossesininvestmentsfromachargeof£185millionin2017toacreditof£667millionin2018 reflectsadversestockmarketmovementsin2018.Theprincipalreasonforthereductioninthetaxchargeattributabletoshort-term temporarydifferencesfrom£526millionin2017to£198millionin2018istheremeasurementofUSdeferredtaxbalancesin2017 from35percentto21percent. In2018,ataxchargeof£270million(2017:chargeof£93million)hasbeentakenthroughothercomprehensiveincome. (b) Reconciliation of shareholder effective tax rate Inthereconciliationbelow,theexpectedtaxratesreflectthecorporationtaxratesthatareexpectedtoapplytothetaxableprofitofthe relevantbusiness.Wherethereareprofitsofmorethanonejurisdictiontheexpectedtaxratesreflectthecorporationtaxratesweighted byreferencetotheamountofprofitcontributingtotheaggregatebusinessresult. Asia operations US operations note(i) 2018 £m UK and Europe Other operations* Total attributable to shareholders Percentage impact on ETR AdjustedIFRSoperatingprofit(loss)basedonlonger-term investmentreturns Non-operatingloss Profit(loss)beforetax Expectedtaxrate Taxattheexpectedrate Effectsofrecurringtaxreconciliationitems: Incomenottaxableortaxableatconcessionaryrates Deductionsnotallowablefortaxpurposes Itemsrelatedtotaxationoflifeinsurance businesses note (ii) Deferredtaxadjustments Effectofresultsofjointventuresandassociates note (iii) Irrecoverablewithholdingtaxes note (iv) Other Total Effectsofnon-recurringtaxreconciliationitems: Adjustmentstotaxchargeinrelationtoprioryears Movementsinprovisionsforopentaxmatters note (v) Total Totalactualtaxcharge(credit) Analysedinto: TaxonadjustedIFRSoperatingprofitbasedonlonger- terminvestmentreturns Taxonnon-operatingprofit Actualtaxrate: AdjustedIFRSoperatingprofitbasedonlonger-term investmentreturns: Includingnon-recurringtaxreconcilingitems Excludingnon-recurringtaxreconcilingitems Totalprofit *Otheroperationsincluderestructuringcosts. 2,164 (527) 1,637 22% 360 1,919 (180) 1,739 21% 365 1,634 (474) 1,160 19% 220 (34) 39 (13) (11) (63) – (3) (85) – 2 2 277 (17) 3 (83) – – – – (97) (17) 4 (13) 255 (6) 15 (2) 2 (3) – 3 9 (11) (2) (13) (890) (11) (901) 19% (171) (2) 10 – (30) 2 47 3 30 14 1 15 216 (126) 4,827 (1,192) 3,635 21% 774 (59) 67 (98) (39) (64) 47 3 (143) (14) 5 (9) 622 21.3% (1.6)% 1.8% (2.7)% (1.1)% (1.8)% 1.3% 0.1% (4.0)% (0.4)% 0.2% (0.2)% 17.1% 308 (31) 301 (46) 313 (97) (130) 4 792 (170) 14% 14% 17% 16% 16% 15% 19% 20% 19% 15% 16% 14% 16% 16% 17% www.prudential.co.uk AnnualReport2018 Prudential plc 211 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationB4 Tax charge continued Notes (i)  (ii)  (iii)  (iv)  Impact of US tax reform The2018taxchargeforUSoperationsreflectsthefullimpactoftheUStaxreformpackage,theTaxCutsandJobsAct,whichwasenactedinDecember2017andtookeffectfrom 1January2018.Theexpectedtaxrateof21percentreflectsthereducedUScorporateincometaxratecomparedto35percentfor2017.Thebenefitofthedividendreceived deduction(showninItemsrelatedtothetaxationoflifeinsurancebusinesses)islowerin2018than2017reflectingthechangestohowthisdeductioniscomputed.In2017,the reductionintheUScorporateincometaxrategaverisetoa£445millionunfavourablereconcilingiteminUSoperationsrelatingtotheremeasurementofthenetdeferredtaxasset attributabletoshareholdersanda£134millionbenefitrecognisedinothercomprehensiveincome. Items related to taxation of life insurance businesses The£83million(2017:£238million)reconcilingiteminUSoperationsreflectstheimpactofthedividendreceiveddeductiononthetaxationofprofitsfromvariableannuity business.TheprincipalreasonforthereductionintheAsiaoperationsreconcilingitemsfrom£92millionat2017to£13millionat2018reflectsnon-operatinginvestmentlossesin HongKongwhichdonotattracttaxreliefoffsettingthebenefitofoperatingprofitsduetothetaxableprofitbeingcomputedas5percentofnetinsurancepremiums. Effects of results of joint ventures and associates ProfitbeforetaxincludesPrudential’sshareofprofitsaftertaxfromthejointventuresandassociates.Therefore,theactualtaxchargedoesnotincludetaxarisingfromprofit orlossofjointventuresandassociatesandisreflectedasareconcilingiteminthetableabove. Irrecoverable withholding taxes The£47million(2017:£54million)adversereconcilingitemsreflectslocalwithholdingtaxesondividendspaidbycertainnon-UKsubsidiaries,principallyIndonesia,totheUK. ThedividendsareexemptfromUKtaxandconsequentlythewithholdingtaxcannotbeoffsetagainstUKtaxpayments. (v) Movements in provisions for open tax matters  Thecomplexityofthetaxlawsandregulationsthatrelatetoourbusinessesmeansthatfromtimetotimewemaydisagreewithtaxauthoritiesonthetechnicalinterpretationofa particularareaoftaxlaw.ThisuncertaintymeansthatinthenormalcourseofbusinesstheGroupwillhavematterswhere,uponultimateresolutionoftheuncertainty,theamount ofprofitsubjecttotaxmaybegreaterthantheamountsreflectedintheGroup’ssubmittedtaxreturns.Thestatementoffinancialpositioncontainsthefollowingprovisionsin relationtoopentaxmatters: £m At31December2017 Movementsinthecurrentperiodincludedin: Taxchargeattributabletoshareholders Othermovements* At31December2018 (139) (5) (5) (149) *OthermovementsincludeinterestarisingonopentaxmattersandamountsincludedintheGroup’sshareofprofitsfromjointventuresandassociates,netofrelatedtax. AdjustedIFRSoperatingprofit(loss)basedonlonger-term investmentreturns Non-operatingprofit(loss) Profit(loss)beforetax Expectedtaxrate Taxattheexpectedrate Effectsofrecurringtaxreconciliationitems: Incomenottaxableortaxableatconcessionaryrates Deductionsnotallowablefortaxpurposes Itemsrelatedtotaxationoflifeinsurancebusinesses Deferredtaxadjustments Effectofresultsofjointventuresandassociates Irrecoverablewithholdingtaxes Other Total Effectsofnon-recurringtaxreconciliationitems: Adjustmentstotaxchargeinrelationtoprioryears Movementsinprovisionsforopentaxmatters ImpactofUStaxreform Adjustmentsinrelationtobusinessdisposals Total Totalactualtaxcharge(credit) Analysedinto: TaxonadjustedIFRSoperatingprofitbasedon longer-terminvestmentreturns Taxonnon-operatingprofit Actualtaxrate: AdjustedIFRSoperatingprofitbasedonlonger-term investmentreturns: Includingnon-recurringtaxreconcilingitems Excludingnon-recurringtaxreconcilingitems Totalprofit *Otheroperationsincluderestructuringcosts. Asia operations US operations UK and Europe Other operations* Total attributable to shareholders Percentage impact on ETR 2017 £m 1,975 53 2,028 21% 426 (64) 26 (92) 11 (52) – (10) (181) (3) 19 – (8) 8 253 2,224 (1,462) 762 35% 267 (11) 6 (238) 17 – – – (226) (15) 25 445 12 467 508 1,378 (14) 1,364 19% 259 (2) 13 (2) (1) (3) – 6 11 (3) – – – (3) (878) 20 (858) 19% (163) (14) 10 – (5) – 54 (1) 44 (3) – – – (3) 267 (122) 276 (23) 548 (40) 268 (1) (121) (1) 14% 13% 12% 25% 24% 67% 19% 20% 20% 14% 13% 14% 4,699 (1,403) 3,296 24% 789 (91) 55 (332) 22 (55) 54 (5) (352) (24) 44 445 4 469 906 971 (65) 21% 20% 27% 23.9% (2.8)% 1.7% (10.1)% 0.7% (1.7)% 1.6% (0.1)% (10.7)% (0.7)% 1.3% 13.5% 0.1% 14.2% 27.4% 212 Prudential plc AnnualReport2018 www.prudential.co.uk B Earnings performance continuedB5 Earnings per share BasedonadjustedIFRSoperating profitbasedonlonger-term investmentreturns Short-termfluctuationsin investmentreturnson shareholder-backedbusiness Amortisationofacquisition accountingadjustments Lossondisposalofbusinessesand corporatetransactions Basedonprofitfortheyear BasedonadjustedIFRSoperating profitbasedonlonger-term investmentreturns Short-termfluctuationsin investmentreturnson shareholder-backedbusiness Amortisationofacquisition accountingadjustments Cumulativeexchangegainonthe soldKorealifebusiness recycledfromother comprehensiveincome Profitattachingtothedisposalof businesses ImpactofUStaxreform Basedonprofitfortheyear Note B1.2 D1.1 Note 2018 Before tax £m  B1.1 Tax £m  B4 Non- controlling interests £m Net of tax and non- controlling interests £m Basic earnings per share  Pence Diluted earnings per share  Pence 4,827 (792) (3) 4,032 156.6p 156.5p (558) (46) (588) 3,635 Before tax £m  B1.1 53 9 108 (622) – – – (3) (505) (19.7)p (19.7)p (37) (1.4)p (1.4)p (480) 3,010 (18.6)p 116.9p (18.6)p 116.8p 2017 Tax £m  B4 Non- controlling interests £m Net of tax and non- controlling interests £m Basic earnings per share  Pence Diluted earnings per share  Pence 4,699 (971) (1) 3,727 145.2p 145.1p B1.2 (1,563) (63) 61 162 – 3,296 D1.1 B4 572 20 – (82) (445) (906) – – – – – (1) (991) (38.6)p (38.6)p (43) (1.7)p (1.7)p 61 2.4p 2.4p 80 (445) 2,389 3.1p (17.3)p 93.1p 3.1p (17.3)p 93.0p Earningspersharearecalculatedbasedonearningsattributabletoordinaryshareholders,afterrelatedtaxandnon-controllinginterests. Theweightedaveragenumberofsharesforcalculatingearningspershare,whichexcludesthoseheldinemployeesharetrustsand consolidatedunittrustsandOEICs,issetoutasbelow: Weightedaveragenumber(inmillions)ofsharesforcalculationof: Basicearningspershare Sharesunderoptionatendofyear Numberofsharesthatwouldhavebeenissuedatfairvalueonassumedoptionprice Dilutedearningspershare 2018 2017 2,575 5 (4) 2,576 2,567 6 (5) 2,568 www.prudential.co.uk AnnualReport2018 Prudential plc 213 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationB6 Dividends Dividendsrelatingtoreportingyear: Firstinterimordinarydividend Secondinterimordinarydividend Total Dividendspaidinreportingyear: Currentyearfirstinterimordinarydividend Secondinterimordinarydividendforprioryear Total 2018 2017  Pence  pershare 15.67p 33.68p 49.35p 15.67p 32.50p 48.17p £m  Pence  pershare 406 873 1,279 404 840 1,244 14.50p 32.50p 47.00p 14.50p 30.57p 45.07p £m  375 841 1,216 373 786 1,159 Dividend per share Fortheyearended31December2017thesecondinterimordinarydividendof32.50penceperordinarysharewaspaidtoeligible shareholderson18May2018.The2018firstinterimordinarydividendof15.67penceperordinarysharewaspaidtoeligible shareholderson27September2018. Thesecondinterimordinarydividendfortheyearended31December2018of33.68penceperordinarysharewillbepaidon17May 2019insterlingtoshareholdersontheUKregisterandtheIrishbranchregisteron29March2019(RecordDate),andinHongKong dollarstoshareholdersontheHongKongbranchregisterat4.30pmHongKongtimeontheRecordDate(HKShareholders).Holdersof USAmericanDepositaryReceipts(USShareholders)willbepaidtheirdividendsinUSdollarsonorabout24May2019.Thesecond interimordinarydividendwillbepaidonorabout24May2019inSingaporedollarstoshareholderswithsharesstandingtothecreditof theirsecuritiesaccountswithTheCentralDepository(Pte)Limited(CDP)at5.00pmSingaporetimeontheRecordDate(SG Shareholders).ThedividendpayabletotheHKShareholderswillbetranslatedusingtheexchangeratequotedbytheWMCompanyat thecloseofbusinesson12March2019.TheexchangerateatwhichthedividendpayabletotheSGShareholderswillbetranslated intoSingaporedollars,willbedeterminedbyCDP. ShareholdersontheUKregisterandIrishbranchregisterareeligibletoparticipateinaDividendReinvestmentPlan. 214 Prudential plc AnnualReport2018 www.prudential.co.uk B Earnings performance continued C Balance sheet notes C1 Analysis of Group statement of financial position by segment 31 Dec 2018 £m By operating segment Assets Goodwill Deferredacquisitioncostsandotherintangibleassets Property,plantandequipment Reinsurers'shareofinsurancecontractliabilities Deferredtaxassets Currenttaxrecoverable Accruedinvestmentincome note (i) Otherdebtors note (i) Investmentproperties Investmentinjointventuresandassociatesaccountedforusing theequitymethod Loans Equitysecuritiesandportfolioholdingsinunittrusts Debtsecurities Derivativeassets Otherinvestments Deposits Assetsheldforsale* Cashandcashequivalents note (ii) Total assets Total equity Liabilities Insurancecontractliabilities Investmentcontractliabilitieswithdiscretionaryparticipation features Investmentcontractliabilitieswithoutdiscretionaryparticipation features Unallocatedsurplusofwith-profitsfunds Corestructuralborrowingsofshareholder-financedbusinesses Operationalborrowingsattributabletoshareholder-financed businesses Borrowingsattributabletowith-profitsbusinesses Obligationsunderfunding,securitieslendingandsaleand repurchaseagreements Netassetvalueattributabletounitholdersofconsolidatedunit trustsandsimilarfunds Deferredtaxliabilities Currenttaxliabilities Accruals,deferredincomeandotherliabilities note (iii) Provisions Derivativeliabilities Liabilitiesheldforsale* Total liabilities Total equity and liabilities Note C5.1 C5.2 C8.1 C8.2 D6 C3.3 C3.2 Asia  C2.1 US  C2.2 498 2,937 129 2,777 119 26 664 2,978 5 – 8,747 246 6,662 2,295 311 498 238 6 991 1,377 – 11,066 32,150 128,657 41,594 45,839 574 296 927 – 92 1,224 – – 3,005 2,189 UK and Europe  C2.3 1,359 195 1,031 2,812 126 244 1,511 4,189 17,914 742 5,567 53,810 85,956 2,513 5,585 10,320 10,578 4,749 Unallo- cated to a segment (central opera- tions) note(iv) Elimin- ation of intra- group debtors and creditors Group total 1,857 11,923 1,409 11,144 2,595 618 2,749 4,088 17,925 – – – (1,109) – (81) – (5,285) – 1,733 – – 18,010 – 214,733 – 175,356 3,494 – 6,512 – 11,796 – 10,578 – 12,125 – – 44 3 2 55 118 76 1,968 – – – 116 1,967 111 – 160 – 2,182 94,199 204,918 209,201 6,802 (6,475) 508,645 6,428 5,624 8,700 (3,485) – 17,267 C4.1 72,349 182,432 68,957 37 (1,109) 322,666 C4.1 C4.1 C4.1 C6.1 C6.2 C6.2 C8.1 C8.2 C11 C3.4 375 – 67,038 – 492 2,511 – 3,168 – 196 15,560 13,334 – 2 – 7,468 61 19 328 – 106 3,921 – 5,765 1,224 2,617 1,257 133 7,641 251 65 – – 1,688 115 5,324 23 255 – 9,013 1,061 326 6,442 743 2,208 10,568 503 – – 21 16 75 1,126 61 978 – – – – – – – – – – (81) (5,285) – – – 67,413 19,222 15,845 7,664 998 3,940 6,989 11,651 4,022 568 15,248 1,078 3,506 10,568 87,771 199,294 200,501 10,287 (6,475) 491,378 94,199 204,918 209,201 6,802 (6,475) 508,645 *Assetsheldforsaleof£10,578millionincludes£10,568millioninrespectofthereinsuredUKannuitybusiness.Thecorrespondingpolicyholderandotherliabilitiesof£10,568millionis reflectedinliabilitiesheldforsale.(seenoteD1.1). www.prudential.co.uk AnnualReport2018 Prudential plc 215 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC1 Analysis of Group statement of financial position by segment continued 31 Dec 2017 £m Note C5.1 C5.2 C8.1 C8.2 D6 C3.3 C3.2 D1 Asia  C2.1 US  C2.2 305 2,540 125 1,960 112 58 595 2,675 5 – 8,219 214 6,424 2,300 298 492 248 5 – 912 1,317 9,630 29,976 130,630 35,378 40,982 1,611 113 848 – 43 1,291 – – 1,658 1,934 UK and Europe  C2.3 1,177 210 447 2,521 157 244 1,558 3,118 16,487 504 5,986 62,670 92,707 2,954 4,774 9,540 38 5,808 84,900 197,998 210,900 C4.1 63,468 177,728 88,180 337 – 62,340 328 3,474 – 2,996 – 184 17,069 13,477 – By operating segment Assets Goodwill Deferredacquisitioncostsandotherintangibleassets Property,plantandequipment Reinsurers'shareofinsurancecontractliabilities Deferredtaxassets Currenttaxrecoverable Accruedinvestmentincome note (i) Otherdebtors note (i) Investmentproperties Investmentinjointventuresandassociatesaccountedforusing theequitymethod Loans Equitysecuritiesandportfolioholdingsinunittrusts Debtsecurities Derivativeassets Otherinvestments Deposits Assetsheldforsale Cashandcashequivalents note (ii) Total assets Total equity Liabilities Insurancecontractliabilities Investmentcontractliabilitieswithdiscretionaryparticipation features Investmentcontractliabilitieswithoutdiscretionaryparticipation features Unallocatedsurplusofwith-profitsfunds Corestructuralborrowingsofshareholder-financedbusinesses Operationalborrowingsattributabletoshareholder-financed businesses Borrowingsattributabletowith-profitsbusinesses Obligationsunderfunding,securitieslendingandsaleand repurchaseagreements Netassetvalueattributabletounitholdersofconsolidatedunit trustsandsimilarfunds Deferredtaxliabilities Currenttaxliabilities Accruals,deferredincomeandotherliabilities note (iii) Provisions Derivativeliabilities Total liabilities Total equity and liabilities C4.1 C4.1 C4.1 C6.1 C6.2 C6.2 C8.1 C8.2 C11 C3.4 508 – 148 3,706 4,304 1,358 – 50 10 – 3,631 1,152 122 6,069 254 79 – 1,845 47 5,109 24 5 5,243 1,703 377 6,609 784 1,661 78,974 192,750 202,655 84,900 197,998 210,900 Unallo- cated to a segment (central opera- tions) note(iv) Elimin- ation of intra- group debtors and creditors Group total 1,482 11,011 789 9,673 2,627 613 2,676 2,963 16,497 1,416 17,042 223,391 171,374 4,801 5,622 11,236 38 10,690 – – – (1,235) – (80) – (5,199) – – – – – – – – – – (6,514) 493,941 – (1,235) 328,172 – – – – – – – – – (80) (5,199) – – 62,677 20,394 16,951 6,280 1,791 3,716 5,662 8,889 4,715 537 14,185 1,123 2,755 (6,514) 477,847 (6,514) 493,941 – 42 3 3 58 93 31 2,121 – – 109 115 2,307 123 – 362 – 1,290 6,657 31 – 1 – 6,096 1,085 – 15 15 71 1,597 61 1,010 9,982 6,657 5,926 5,248 8,245 (3,325) – 16,094 216 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedNotes (i) Accrued investment income and other debtors Interestreceivable Other Totalaccruedinvestmentincome Otherdebtorscomprises: Amountsduefrom Policyholders Intermediaries Reinsurers Other Totalotherdebtors Total accrued investment income and other debtors Analysedas: Expectedtobesettledwithinoneyear Expectedtobesettledafteroneyear Total accrued investment income and other debtors (ii) Cash and cash equivalents Cash Cashequivalents Total cash and cash equivalents Analysedas: HeldcentrallyandavailableforgeneralusebytheGroup OtherfundsnotavailableforgeneralusebytheGroup,includingfundsheldforthebenefitofpolicyholders Total cash and cash equivalents 31 Dec 2018 £m 31 Dec 2017 £m 1,744 1,005 2,749 452 3 218 3,415 4,088 6,837 6,151 686 6,837 1,789 887 2,676 408 4 134 2,417 2,963 5,639 4,957 682 5,639 31 Dec 2018 £m 31 Dec 2017 £m 5,759 6,366 12,125 349 11,776 12,125 6,623 4,067 10,690 328 10,362 10,690  TheGroup’scashandcashequivalentsareheldinthefollowingcurrencies:poundssterling32percent,USdollars38percent,Euro15percentandothercurrencies15percent (2017:poundssterling31percent,USdollars28percent,Euro24percentandothercurrencies17percent). (iii) Accruals, deferred income and other liabilities Accrualsanddeferredincome Othercreditors Creditorsarisingfromdirectinsuranceandreinsuranceoperations Interestpayable FundswithheldunderreinsuranceoftheREALICbusiness Otheritems Total accruals, deferred income and other liabilities (iv) Unallocated to a segment includes central operations, Prudential Capital and Africa operations as per note B1.3. 31 Dec 2018 £m 31 Dec 2017 £m 1,700 7,074 2,363 117 2,941 1,053 1,233 7,289 2,296 100 2,664 603 15,248 14,185 www.prudential.co.uk AnnualReport2018 Prudential plc 217 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C2 Analysis of segment statement of financial position by business type C2.1 Asia 31 Dec 2018 £m Insurance With- profits business* Unit- linked assets and liabilities Note Other business Total Asset manage- ment Elimin- ations Assets Goodwill Deferredacquisitioncostsandother intangibleassets Property,plantandequipment Reinsurers'shareofinsurancecontract liabilities Deferredtaxassets Currenttaxrecoverable Accruedinvestmentincome Otherdebtors Investmentproperties Investmentinjointventuresand associatesaccountedforusingthe equitymethod Loans Equitysecuritiesandportfolioholdings inunittrusts Debtsecurities Derivativeassets Deposits Cashandcashequivalents Total assets Total equity Liabilities Insurancecontractliabilities Investmentcontractliabilitieswith discretionaryparticipationfeatures Investmentcontractliabilitieswithout discretionaryparticipationfeatures Unallocatedsurplusofwith-profitsfunds Operationalborrowingsattributableto shareholder-financedbusinesses Borrowingsattributabletowith-profits businesses Netassetvalueattributabletounit holdersofconsolidatedunittrusts andsimilarfunds Deferredtaxliabilities Currenttaxliabilities Accruals,deferredincomeandother liabilities Provisions Derivativeliabilities Total liabilities 251 251 247 – – – – 1 2 51 730 – 2,870 34 2,714 108 23 327 535 5 2,926 124 2,777 109 25 632 2,941 5 – 56 90 63 – – 254 1,676 – – 792 C3.3 C3.2 – – 827 585 827 1,377 17,165 27,204 201 250 870 12,804 3,981 4 455 326 2,146 14,583 91 458 874 32,115 45,768 296 1,163 2,070 48,621 18,354 26,431 93,406 – – 5,868 5,868 40,389 15,876 16,084 72,349 C4.1(b) 375 C4.1(b) – 2,511 – 19 1,242 812 27 3,138 57 51 – 492 – 50 – – – – 11 – 1,024 21 – 351 422 93 889 – 2 3,475 115 12 375 492 2,511 61 19 2,617 1,255 120 7,502 172 65 48,621 18,354 20,563 87,538 11 5 – 10 1 32 77 – 164 – 35 71 – 61 119 833 560 – – – – – – – 2 13 179 79 – 273 833 31 Dec 2017 £m Total Total 498 305 – – – – – – – (40) – 2,937 129 2,777 119 26 664 2,978 5 – – – – – – – 991 1,377 32,150 45,839 296 1,224 2,189 2,540 125 1,960 112 58 595 2,675 5 912 1,317 29,976 40,982 113 1,291 1,934 (40) 94,199 84,900 – – – – – – – – – – (40) – – 6,428 5,926 72,349 63,468 375 337 492 2,511 328 3,474 61 19 2,617 1,257 133 7,641 251 65 50 10 3,631 1,152 122 6,069 254 79 (40) 87,771 78,974 (40) 94,199 84,900 Total equity and liabilities 48,621 18,354 26,431 93,406 *Thestatementoffinancialpositionforwith-profitsbusinesscomprisesthewith-profitsassetsandliabilitiesoftheHongKong,MalaysiaandSingaporeoperations.Assetsandliabilitiesof otherparticipatingbusinessareincludedinthecolumnfor‘Otherbusiness’. 218 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC2.2 US 31 Dec 2018 £m 31 Dec 2017 £m Variable annuity separate account assets and liabilities Note Insurance Fixed annuity, GICs and other business Asset manage- ment Elimin- ations Total Total Total Assets Goodwill Deferredacquisitioncostsandotherintangible assets Property,plantandequipment Reinsurers'shareofinsurancecontractliabilities Deferredtaxassets Currenttaxrecoverable Accruedinvestmentincome Otherdebtors Investmentproperties Loans Equitysecuritiesandportfolioholdingsinunit trusts Debtsecurities Derivativeassets Otherinvestments Deposits Cashandcashequivalents Total assets Total equity C3.3 C3.2 Liabilities Insurancecontractliabilities Investmentcontractliabilitieswithoutdiscretionary participationfeatures C4.1(c) Corestructuralborrowingsofshareholder-financed businesses Operationalborrowingsattributableto shareholder-financedbusinesses Obligationsunderfunding,securitieslendingand saleandrepurchaseagreements Netassetvalueattributabletounitholdersof consolidatedunittrustsandsimilarfunds Deferredtaxliabilities Currenttaxliabilities Accruals,deferredincomeandotherliabilities Provisions Derivativeliabilities Total liabilities Total equity and liabilities – – – – – – – – – – – – 8,747 243 6,662 2,271 309 493 230 6 11,066 8,747 243 6,662 2,271 309 493 230 6 11,066 128,220 – – – – – 433 128,653 41,594 574 926 – 2,976 41,594 574 926 – 2,976 128,220 76,530 204,750 – 5,584 5,584 128,220 54,212 182,432 – – – – – – – – – – 3,168 3,168 196 328 196 328 5,765 5,765 – 1,688 114 5,197 23 255 – 1,688 114 5,197 23 255 128,220 70,946 199,166 128,220 76,530 204,750 – – 3 – 24 2 5 76 – – 4 – – 1 92 29 – – – – – – – – – (68) – – 8,747 246 6,662 2,295 311 498 238 6 11,066 8,219 214 6,424 2,300 298 492 248 5 9,630 – 128,657 41,594 – 574 – 927 – 92 – 3,005 – 130,630 35,378 1,611 848 43 1,658 236 40 (68) 204,918 197,998 – 5,624 5,248 – – – – – – – 1 195 – – 196 236 – 182,432 177,728 – – – – 3,168 2,996 196 328 184 508 5,765 4,304 – – – (68) – – – 1,688 115 5,324 23 255 – 1,845 47 5,109 24 5 (68) 199,294 192,750 (68) 204,918 197,998 www.prudential.co.uk AnnualReport2018 Prudential plc 219 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC2 Analysis of segment statement of financial position by business type continued C2.3 UK and Europe 31 Dec 2018 £m 31 Dec 2017 £m Insurance Other funds and subsidiaries With- profits business* Unit- linked assets and liabilities Note Annuity and other long-term business Asset manage- ment Elimin- ations Total 206 83 895 1,131 61 58 1,010 2,102 15,635 705 3,853 41,090 53,798 1,957 5,573 8,530 10 3,520 140,217 – – – – 115 – 6 116 575 618 – – 12,477 10,512 1 10 1,101 – 190 25,721 – C3.3 C3.2 – 94 39 1,566 45 174 378 641 1,661 – 1,714 20 21,646 555 1 689 10,568 688 206 1,153 177 934 2,812 106 238 1,504 3,318 17,914 705 5,567 53,587 85,956 2,513 5,584 10,320 10,578 4,398 18 97 – 20 6 7 1,011 – 37 – 223 – – 1 – – 351 – – – – – – – (140) – – – – – – – – – – Total Total 1,359 1,177 195 1,031 2,812 126 244 1,511 4,189 17,914 742 5,567 53,810 85,956 2,513 5,585 10,320 10,578 4,749 210 447 2,521 157 244 1,558 3,118 16,487 504 5,986 62,670 92,707 2,954 4,774 9,540 38 5,808 40,479 206,417 6,540 6,540 2,924 2,160 (140) 209,201 8,700 – 210,900 8,245 C4.1(d) 43,775 5,219 19,963 68,957 C4.1(d) 67,018 – 20 67,038 C4.1(d) 2 13,334 15,498 – 60 – 15,560 13,334 4 – – 102 106 – 3,921 225 1,224 – – – – – – – – – – – – – – 68,957 88,180 67,038 62,340 15,560 13,334 17,069 13,477 106 148 3,921 3,706 1,224 1,358 4,643 – – 354 – 3 – 21 147 269 1,141 484 939 10,568 9,013 1,039 298 6,096 516 2,207 10,568 – 22 28 486 227 1 – – – – (140) – – – 9,013 1,061 326 6,442 743 2,208 10,568 5,243 1,703 377 6,609 784 1,661 – – 3,921 999 4,349 892 29 4,601 32 1,265 – Assets Goodwill Deferredacquisitioncostsandother intangibleassets Property,plantandequipment Reinsurers'shareofinsurancecontract liabilities Deferredtaxassets Currenttaxrecoverable Accruedinvestmentincome Otherdebtors Investmentproperties Investmentinjointventuresandassociates accountedforusingtheequitymethod Loans Equitysecuritiesandportfolioholdings inunittrusts Debtsecurities Derivativeassets Otherinvestments Deposits Assetsheldforsale Cashandcashequivalents Total assets Total equity Liabilities Insurancecontractliabilities Investmentcontractliabilitieswith discretionaryparticipationfeatures Investmentcontractliabilitieswithout discretionaryparticipationfeatures Unallocatedsurplusofwith-profitsfunds Operationalborrowingsattributableto shareholder-financedbusinesses Borrowingsattributabletowith-profits businesses Obligationsunderfunding,securitieslending andsaleandrepurchaseagreements Netassetvalueattributabletounitholdersof consolidatedunittrustsandsimilarfunds Deferredtaxliabilities Currenttaxliabilities Accrualsdeferredincomeandotherliabilities Provisions Derivativeliabilities Liabilitiesheldforsale Total liabilities Total equity and liabilities 140,217 140,217 25,721 25,721 33,939 199,877 40,479 206,417 764 2,924 (140) 200,501 (140) 209,201 202,655 210,900 *IncludestheScottishAmicableInsuranceFundwhich,at31December2018,hadtotalassetsandliabilitiesof£4,844million(2017:£5,768million).ThePACwith-profitssub-fund (WPSF)mainlycontainswith-profitsbusinessbutitalsocontainssomenon-profitbusiness(unit-linked,termassurancesandannuities).TheUKwith-profitsfundincludes£9.5billion (2017:£10.6billion)ofnon-profitsannuitiesliabilities. 220 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC3 Assets and liabilities C3.1 Group assets and liabilities – measurement (a) Determination of fair value ThefairvaluesofthefinancialinstrumentsforwhichfairvaluationisrequiredunderIFRSaredeterminedbytheuseofcurrentmarketbid pricesforexchange-quotedinvestmentsorbyusingquotationsfromindependentthirdpartiessuchasbrokersandpricingservicesorby usingappropriatevaluationtechniques. TheestimatedfairvalueofderivativefinancialinstrumentsreflectstheestimatedamounttheGroupwouldreceiveorpayinan arm’s-lengthtransaction.Thisamountisdeterminedusingquotedpricesifexchangelisted,quotationsfromindependentthirdpartiesor valuedinternallyusingstandardmarketpractices. Otherthantheloanswhichhavebeendesignatedatfairvaluethroughprofitorloss,theloansandreceivableshavebeenshownnetof provisionsforimpairment.Thefairvalueofloanshavebeenestimatedfromdiscountedcashflowsexpectedtobereceived.Thediscount rateisupdatedforthemarketrateofinterestwhereapplicable. Thefairvalueofinvestmentpropertiesisbasedonmarketvaluesasassessedbyprofessionallyqualifiedexternalvaluersorbythe Group’squalifiedsurveyors. Thefairvalueofthesubordinatedandseniordebtissuedbytheparentcompanyisdeterminedusingquotedpricesfromindependent thirdparties. Thefairvalueoffinancialliabilities(otherthanderivativefinancialinstruments)isdeterminedusingdiscountedcashflowsofthe amountsexpectedtobepaid. (b) Fair value measurement hierarchy of Group assets and liabilities Assets and liabilities carried at fair value on the statement of financial position ThetableoverleafshowstheassetsandliabilitiescarriedatfairvalueanalysedbyleveloftheIFRS13,‘FairValueMeasurement’defined fairvaluehierarchy.Thishierarchyisbasedontheinputstothefairvaluemeasurementandreflectsthelowestlevelinputthatis significanttothatmeasurement. www.prudential.co.uk AnnualReport2018 Prudential plc 221 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC3 Assets and liabilities continued C3.1 Group assets and liabilities – measurement continued Financial instruments at fair value Analysis of financial investments, net of derivative liabilities by business type With-profits Loans Equitysecuritiesandportfolioholdingsinunittrusts Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Percentageoftotal Unit-linked and variable annuity separate account Equitysecuritiesandportfolioholdingsinunittrusts Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Percentageoftotal Non-linked shareholder-backed Loans Equitysecuritiesandportfolioholdingsinunittrusts Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Percentageoftotal Group total analysis, including other financial liabilities held at fair value Loans Equitysecuritiesandportfolioholdingsinunittrusts Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Investmentcontractliabilitieswithoutdiscretionaryparticipationfeatures heldatfairvalue Borrowingsattributabletowith-profitsbusinesses Netassetvalueattributabletounitholdersofconsolidatedunittrusts andsimilarfunds Otherfinancialliabilitiesheldatfairvalue Totalfinancialinstrumentsatfairvalue Percentageoftotal 31 Dec 2018 £m Level 1 Level 2 Level 3 Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs – 52,320 31,210 143 (85) 83,588 57% 152,987 4,766 6 (2) 157,757 94% – 2,957 17,687 61 (2) 20,703 24% – 5,447 48,981 3,263 (1,231) 56,460 38% 505 9,727 3 (3) 10,232 6% – 2 61,803 1,258 (1,760) 61,303 71% 1,703 488 811 4,325 – 7,327 5% 9 – 6 – 15 0% 3,050 18 371 941 (423) 3,957 5% Total 1,703 58,255 81,002 7,731 (1,316) 147,375 100% 153,501 14,493 15 (5) 168,004 100% 3,050 2,977 79,861 2,260 (2,185) 85,963 100% – 208,264 53,663 210 (89) – 5,954 120,511 4,524 (2,994) 4,753 515 1,182 5,272 (423) 4,753 214,733 175,356 10,006 (3,506) 262,048 127,995 11,299 401,342 – – (16,054) – (6,852) – (3,811) (2) 255,196 70% 108,128 29% – (1,606) (988) (3,404) 5,301 1% (16,054) (1,606) (11,651) (3,406) 368,625 100% 222 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedAnalysis of financial investments, net of derivative liabilities by business type With-profits Loans Equitysecuritiesandportfolioholdingsinunittrusts Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Percentageoftotal Unit-linked and variable annuity separate account Equitysecuritiesandportfolioholdingsinunittrusts Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Percentageoftotal Non-linked shareholder-backed Loans Equitysecuritiesandportfolioholdingsinunittrusts Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Percentageoftotal Group total analysis, including other financial liabilities held at fair value Loans Equitysecuritiesandportfolioholdingsinunittrusts Debtsecurities Otherinvestments(includingderivativeassets) Derivativeliabilities Totalfinancialinvestments,netofderivativeliabilities Investmentcontractliabilitieswithoutdiscretionaryparticipationfeatures heldatfairvalue Borrowingsattributabletowith-profitsbusinesses Netassetvalueattributabletounitholdersofconsolidatedunittrusts andsimilarfunds Otherfinancialliabilitiesheldatfairvalue Totalfinancialinstrumentsatfairvalue Percentageoftotal 31 Dec 2017 £m Level 1 Level 2 Level 3 Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs – 57,347 29,143 68 (68) 86,490 60% 158,631 4,993 12 – 163,636 97% – 2,105 21,443 7 – 23,555 25% – 4,470 45,602 3,638 (615) 53,095 36% 457 5,226 4 (1) 5,686 3% – 10 64,313 2,270 (1,559) 65,034 71% 2,023 351 348 3,540 – 6,262 4% 10 – 8 – 18 0% 2,814 10 306 876 (512) 3,494 4% Total 2,023 62,168 75,093 7,246 (683) 145,847 100% 159,098 10,219 24 (1) 169,340 100% 2,814 2,125 86,062 3,153 (2,071) 92,083 100% – 218,083 55,579 87 (68) – 4,937 115,141 5,912 (2,175) 4,837 371 654 4,424 (512) 4,837 223,391 171,374 10,423 (2,755) 273,681 123,815 9,774 407,270 – – (4,836) – 268,845 72% (17,397) – (3,640) – 102,778 27% – (1,887) (413) (3,031) 4,443 1% (17,397) (1,887) (8,889) (3,031) 376,066 100% Allassetsandliabilitiesheldatfairvalueareclassifiedasfairvaluethroughprofitorloss,exceptfor£40,849million(31December2017: £35,293million)ofdebtsecuritiesclassifiedasavailable-for-sale. www.prudential.co.uk AnnualReport2018 Prudential plc 223 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC3 Assets and liabilities continued C3.1 Group assets and liabilities – measurement continued Investment properties at fair value 2018 2017 31 Dec £m Level 1 Level 2 Level 3 Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs – – – – 17,925 16,497 Total 17,925 16,497 Assets and liabilities at amortised cost and their fair value Thetablebelowshowstheassetsandliabilitiescarriedatamortisedcostonthestatementoffinancialpositionandtheirfairvalue.The assetsandliabilitiesthatarecarriedatamortisedcostbutwherethecarryingvalueapproximatesthefairvalue,areexcludedfromthe analysisbelow. 31 Dec 2018 £m Level 1 Level 2 Level 3 Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs Total fair value Total carrying value Assets Loans note (i) Liabilities Investmentcontractliabilitieswithoutdiscretionary participationfeatures Corestructuralborrowingsofshareholder-financed businesses note (ii) Operationalborrowingsattributabletoshareholder-financed businesses Borrowingsattributabletothewith-profitsfunds Obligationsunderfunding,securitieslendingandsaleand repurchaseagreements – – – – – – 2,898 10,768 13,666 13,257 – (3,157) (3,157) (3,168) (7,847) (994) (2,035) – (7,847) (7,664) (4) (68) (998) (2,103) (998) (2,334) (1,258) (5,750) (7,008) (6,989) 224 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continued31 Dec 2017 £m Level 1 Level 2 Level 3 Quoted prices (unadjusted) in active markets Valuation based on significant observable market inputs Valuation based on significant unobservable market inputs Total fair value Total carrying value Assets Loans note (i) Liabilities Investmentcontractliabilitieswithoutdiscretionary participationfeatures Corestructuralborrowingsofshareholder-financed businesses note (ii) Operationalborrowingsattributabletoshareholder-financed businesses Borrowingsattributabletothewith-profitsfunds Obligationsunderfunding,securitieslendingandsaleand repurchaseagreements – – – – – – 2,756 10,183 12,939 12,205 – (3,032) (3,032) (2,997) (7,023) (1,788) (1,761) – (7,023) (6,280) (3) (71) (1,791) (1,832) (1,791) (1,829) (1,410) (4,318) (5,728) (5,662) Notes (i) (ii) Thecarryingvalueofloansandreceivablesarereportednetofallowanceforloanlossesof£46million(31December2017:£28million). Asat31December2018,£376million(31December2017:£312million)ofconvertiblebondswereincludedindebtsecuritiesand£981million(31December2017:£1,311million) wereincludedinborrowings. Thefairvalueoftheassetsandliabilitiesinthetableabove,withtheexceptionofthesubordinatedandseniordebtissuedbytheparent company,hasbeenestimatedfromthediscountedcashflowsexpectedtobereceivedorpaid.Whereappropriate,theobservable marketinterestratehasbeenusedandtheassetsandliabilitiesareclassifiedwithinlevel2.Otherwise,theyareincludedaslevel3assets orliabilities. Thefairvalueincludedforthesubordinatedandseniordebtissuedbytheparentcompanyisdeterminedusingquotedpricesfrom independentthirdparties. (c) Valuation approach for level 2 fair valued assets and liabilities AsignificantproportionoftheGroup’slevel2assetsarecorporatebonds,structuredsecuritiesandothernon-nationalgovernmentdebt securities.Theseassets,inlinewithmarketpractice,aregenerallyvaluedusingadesignatedindependentpricingserviceorquotefrom third-partybrokers.Thesevaluationsaresubjecttoanumberofmonitoringcontrols,suchascomparisontomultiplepricingsources whereavailable,monthlypricevariances,stalepricereviewsandvarianceanalysisonpricesachievedonsubsequenttrades. Whenpricesarenotavailablefrompricingservices,quotesaresourceddirectlyfrombrokers.Prudentialseekstoobtainanumberof quotesfromdifferentbrokerssoastoobtainthemostcomprehensiveinformationavailableontheirexecutability.Wherequotesare sourceddirectlyfrombrokers,thepriceusedinthevaluationisnormallyselectedfromoneofthequotesbasedonanumberoffactors, includingthetimelinessandregularityofthequotesandtheaccuracyofthequotesconsideringthespreadsprovided.Theselected quoteistheonewhichbestrepresentsanexecutablequoteforthesecurityatthemeasurementdate. Generally,noadjustmentismadetothepricesobtainedfromindependentthirdparties.Adjustmentismadeinonlylimited circumstances,whereitisdeterminedthatthethird-partyvaluationsobtaineddonotreflectfairvalue(egeitherbecausethevalueis staleand/orthevaluesareextremelydiverseinrange).Theseareusuallysecuritieswhicharedistressedorthatcouldbesubjecttoadebt restructureorwherereliablemarketpricesarenolongeravailableduetoaninactivemarketormarketdislocation.Intheseinstances, pricesarederivedusinginternalvaluationtechniquesincludingthoseasdescribedbelowinthisnotewiththeobjectiveofarrivingata fairvaluemeasurementthatreflectsthepriceatwhichanorderlytransactionwouldtakeplacebetweenmarketparticipantsonthe measurementdate.Thetechniquesusedrequireanumberofassumptionsrelatingtovariablessuchascreditriskandinterestrates. Examplesofsuchvariablesincludeanaveragecreditspreadbasedonthecorporatebonduniverseandtherelevantdurationoftheasset beingvalued.Prudentialdeterminestheinputassumptionsbasedonthebestavailableinformationatthemeasurementdates.Securities valuedinsuchmannerareclassifiedaslevel3wherethesesignificantinputsarenotbasedonobservablemarketdata. Ofthetotallevel2debtsecuritiesof£120,511millionat31December2018(31December2017:£115,141million),£15,425millionare valuedinternally(31December2017:£13,910million).Themajorityofsuchsecuritiesarevaluedusingmatrixpricing,whichisbasedon assessingthecreditqualityoftheunderlyingborrowertoderiveasuitablediscountraterelativetogovernmentsecuritiesofacomparable duration.Undermatrixpricing,thedebtsecuritiesarepricedtakingthecreditspreadsoncomparablequotedpublicdebtsecuritiesand applyingthesetotheequivalentdebtinstrumentsfactoringinaspecifiedliquiditypremium.Themajorityoftheparametersusedinthis valuationtechniquearereadilyobservableinthemarketand,therefore,arenotsubjecttointerpretation. www.prudential.co.uk AnnualReport2018 Prudential plc 225 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC3 Assets and liabilities continued C3.1 Group assets and liabilities – measurement continued (d) Fair value measurements for level 3 fair valued assets and liabilities Reconciliation of movements in level 3 assets and liabilities measured at fair value Thefollowingtablereconcilesthevalueoflevel3fairvaluedassetsandliabilitiesat1January2018tothatpresentedat31December2018. Financial instruments at fair value  £m Total gains (losses) recorded as other compre- hensive income Total net gains (losses) in income statement* Purchases Sales Settled Issued Transfers into level 3 Transfers out of level 3 At 1 Jan 4,837 371 654 4,424 (512) (78) 162 62 (178) (331) 279 38 (7) 405 27 8 – 54 (1) 125 666 1,202 – (35) (131) (813) – – – – – – – – – 9,774 385 223 2,055 (1,157) (331) 279 (1,887) (23) – (413) (3,031) 67 5 31 (170) – – – – – – 304 – 57 273 (697) (481) 4,443 434 84 2,055 (1,157) 303 (899) At 31 Dec 4,753 515 1,182 – – – – 63 5,272 (423) 63 11,299 – (1,606) (33) – (988) (3,404) 30 5,301 – 8 – – – 8 – – – 8 2,699 722 942 4,480 (516) 17 11 51 73 4 (235) 2,129 – (311) 236 302 – 4,837 (5) (11) (133) – 186 216 727 – (468) (522) (725) – (6) – – – – – – – 1 – 2 – (70) (22) 371 654 – – 4,424 (512) 8,327 156 (384) 3,258 (1,715) (317) 236 305 (92) 9,774 – (13) – – (883) (2,851) (559) 14 – 250 (13) – – – – 115 (1,989) – 1,276 252 (234) (311) – (385) – – – (1,887) (413) (3,031) 4,593 (402) (134) 3,245 (1,715) 1,326 (2,298) (80) (92) 4,443 2018 Loans Equitysecuritiesandportfolio holdingsinunittrusts Debtsecurities Otherinvestments(including derivativeassets) Derivativeliabilities Totalfinancialinvestments, netofderivativeliabilities Borrowingsattributableto with-profitsbusinesses Netassetvalueattributableto unitholdersofconsolidated unittrustsandsimilarfunds Otherfinancialliabilities Totalfinancialinstruments atfairvalue 2017 Loans Equitysecuritiesandportfolio holdingsinunittrusts Debtsecurities Otherinvestments(including derivativeassets) Derivativeliabilities Totalfinancialinvestments, netofderivativeliabilities Borrowingsattributableto with-profitsbusinesses Netassetvalueattributableto unitholdersofconsolidated unittrustsandsimilarfunds Otherfinancialliabilities Totalfinancialinstruments atfairvalue *Ofthetotalnetgainsand(losses)intheincomestatementof£434million(2017:£(402)million),£398million(2017:£(139)million)relatestonetunrealisedgainsandlossesoffinancial instrumentsstillheldattheendoftheyear,whichcanbeanalysedasfollows: Loans Equitysecurities Debtsecurities Otherinvestments Derivativeliabilities Borrowingsattributabletowith-profitsbusinesses Netassetvalueattributabletounitholdersofconsolidatedunittrustsandsimilarfunds Otherfinancialliabilities Total 2018 £m 2017 £m (71) 38 (16) 370 27 (23) 67 6 398 20 (12) (5) (22) 4 (13) (123) 12 (139) 226 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continued Other assets at fair value – investment properties At 1 Jan 16,497 14,646 Total gains in income statement* Total (losses) in other comprehensive income 97 415 – (21) £m Purchases 1,509 2,048 Transfers into level 3 Transfers out of level 3 – – – – Sales (178) (591) At 31 Dec 17,925 16,497 2018 2017 *Ofthetotalnetgainsintheincomestatementof£97million(2017:£415million),£149million(2017:£394million)relatestonetunrealisedgainsofinvestmentpropertiesstillheldatthe endoftheyear. Valuation approach for level 3 fair valued assets and liabilities Financial instruments at fair value Investmentsvaluedusingvaluationtechniquesincludefinancialinvestmentswhichbytheirnaturedonothaveanexternallyquoted pricebasedonregulartrades,andfinancialinvestmentsforwhichmarketsarenolongeractiveasaresultofmarketconditions,egmarket illiquidity.Thevaluationtechniquesusedincludecomparisontorecentarm’s-lengthtransactions,referencetootherinstrumentsthatare substantiallythesame,discountedcashflowanalysis,optionadjustedspreadmodelsand,ifapplicable,enterprisevaluation.These techniquesmayincludeanumberofassumptionsrelatingtovariablessuchascreditriskandinterestrates.Changesinassumptions relatingtothesevariablescouldpositivelyornegativelyimpactthereportedfairvalueoftheseinstruments.Whendeterminingthe inputsintothevaluationtechniquesusedpriorityisgiventopubliclyavailablepricesfromindependentsourceswhenavailable,but overallthesourceofpricingischosenwiththeobjectiveofarrivingatafairvaluemeasurementthatreflectsthepriceatwhichanorderly transactionwouldtakeplacebetweenmarketparticipantsonthemeasurementdate. Thefairvalueestimatesaremadeataspecificpointintime,baseduponavailablemarketinformationandjudgementsaboutthe financialinstruments,includingestimatesofthetimingandamountofexpectedfuturecashflowsandthecreditstandingof counterparties.Suchestimatesdonotreflectanypremiumordiscountthatcouldresultfromofferingforsaleatonetimeasignificant volumeofaparticularfinancialinstrument,nordotheyconsiderthetaximpactoftherealisationofunrealisedgainsorlossesfromselling thefinancialinstrumentbeingfairvalued. InaccordancewiththeGroup’sriskmanagementframework,theestimatedfairvalueofderivativefinancialinstrumentsvalued internallyusingstandardmarketpracticesaresubjecttoassessmentagainstexternalcounterparties’valuations. At31December2018,theGroupheld£5,301million(31December2017:£4,443million)ofnetfinancialinstrumentsatfairvalue withinlevel3.Thisrepresents1percent(31December2017:1percent)ofthetotalfairvaluedfinancialassetsnetoffairvaluedfinancial liabilities.Theprincipalfinancialassets,netofcorrespondingliabilities,classifiedasfairvaluewithinlevel3asof31December2018are describedbelow: (i) £1,702millionofloans(31December2017:£1,983million)andacorresponding£1,606million(31December2017:£1,887million) ofborrowingsareheldbyasubsidiaryoftheGroup’sUKwith-profitsfund,attachingtoaportfolioofbuy-to-letmortgagesandother loansfinancedlargelybyexternalthird-party(non-recourse)borrowings.SeenoteC3.3(c)forfurtherdetails.TheGroup’sexposure islimitedtotheinvestmentheldbytheUKwith-profitsfund,ratherthantotheindividualloansandborrowingsthemselves.Thefair valuemovementsoftheseloansandborrowingshavenoeffectonshareholders’profitandequity.Themostsignificantnon-observable inputstothemortgagefairvaluearetheleveloffuturedefaultsandprepaymentsbythemortgageholders. (ii)Loansof£2,783millionat31December2018(31December2017:£2,512million),measuredastheloanoutstandingbalance,plus accruedinvestmentincome,attachedtoacquiredREALICbusinessandheldtobacktheliabilitiesforfundswithheldunder reinsurancearrangements.Thefundswithheldliabilityof£2,941millionat31December2018(31December2017:£2,664million)is alsoclassifiedwithinlevel3,accountedforonafairvaluebasisbeingequivalenttothecarryingvalueoftheunderlyingassets. (iii)Excludingtheabove,thelevel3fairvaluedfinancialassetsnetoffinancialliabilitiesare£5,363million(31December2017: £4,499million).Ofthisamount,anetliabilityof£(298)million(31December2017:netliabilityof£(117)million)isinternallyvalued, representinglessthan0.1percentofthetotalfairvaluedfinancialassetsnetoffinancialliabilities(31December2017:lessthan 0.1percent).Internalvaluationsareinherentlymoresubjectivethanexternalvaluations.Includedwithintheseinternallyvalued netasset/liabilityare:   (a)Debtsecuritiesof£582million(31December2017:£500million),whichareeithervaluedonadiscountedcashflowmethodwith aninternallydevelopeddiscountrateoronexternalpricesadjustedtoreflectthespecificknownconditionsrelatingtothese securities(egdistressedsecuritiesorsecuritieswhichwerebeingrestructured). (b)Privateequityandventureinvestmentsinbothdebtandequitysecuritiesof£512million(31December2017:£217million) whicharevaluedinternallyusingdiscountedcashflowsbasedonmanagementinformationavailablefortheseinvestments. Thesignificantunobservableinputsincludethedeterminationofexpectedfuturecashflowsontheinvestmentsbeingvalued, determinationoftheprobabilityofcounterpartydefaultandprepaymentsandtheselectionofappropriatediscountrates. ThevaluationisperformedinaccordancewithInternationalPrivateEquityandVentureCapitalAssociationValuationguidelines. Theseinvestmentsareprincipallyheldbyconsolidatedinvestmentfundsthataremanagedonbehalfofthirdparties. www.prudential.co.uk AnnualReport2018 Prudential plc 227 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC3 Assets and liabilities continued C3.1 Group assets and liabilities – measurement continued (d) Fair value measurements for level 3 fair valued assets and liabilitiescontinued  (c)Equityreleasemortgageloaninvestmentsof£268millionandacorrespondingloanliabilitybackedbytheseinvestmentsof £(354)million(31December2017:£302millionloaninvestmentsandacorrespondingliabilityof£(385)million)whicharevalued internallyusingthediscountedcashflowmodels.Theinputsthataresignificanttothevaluationoftheseinvestmentsareprimarily theeconomicassumptions,beingthediscountrate(risk-freerateplusaliquiditypremium)andpropertyvalues. (d)Liabilitiesof£(898)million(31December2017:£(403)million)forthenetassetvalueattributabletoexternalunitholdersinrespect oftheconsolidatedinvestmentfunds,whicharenon-recoursetotheGroup.Theseliabilitiesarevaluedbyreferencetothe underlyingassets. (e)Derivativeliabilitiesof£(423)million(31December2017:£(512)million)whicharevaluedinternallyusingthediscounted cashflowmethodinlinewithstandardmarketpracticesbutaresubjecttoindependentassessmentagainstexternal counterparties’valuations.   (f) Othersundryindividualfinancialinvestmentsof£15million(31December2017:£164million).   Oftheinternallyvaluednetliabilityreferredtoaboveof£(298)million(31December2017:netliabilityof£(117)million): — Anetliabilityof£(53)million(31December2017:netasset£67million)isheldbytheGroup’sparticipatingfundsandtherefore shareholders’profitandequityarenotimpactedbymovementsinthevaluationofthesefinancialinstruments;and — Anetliabilityof£(245)million(31December2017:£(184)million)isheldtosupportnon-linkedshareholder-backedbusiness. Ifthevalueofallthelevel3instrumentsheldtosupportnon-linkedshareholder-backedbusinessvaluedinternallydecreasedby 10percent,thechangeinvaluationwouldbe£24million(31December2017:£18million),whichwouldreduceshareholders’equity bythisamountbeforetax.Allthisamountpassesthroughtheincomestatementsubstantiallyaspartofshort-termfluctuationsin investmentreturnsoutsideofadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns. Other assets at fair value – investment properties TheinvestmentpropertiesoftheGroupareprincipallyheldbytheUKandEuropeinsuranceoperationsthatareexternallyvaluedby professionallyqualifiedexternalvaluersusingtheRoyalInstitutionofCharteredSurveyors(RICS)valuationstandards.An‘income capitalisation’techniqueispredominantlyappliedfortheseproperties.Thistechniquecalculatesthevaluethroughtheyieldandrental valuedependingonfactorssuchastheleaselength,buildingquality,covenantandlocation.Thevariablesusedarecomparedtorecent transactionswithsimilarfeaturestothoseoftheGroup’sinvestmentproperties.Asthecomparisonsarenotwithpropertiesthatare virtuallyidenticaltotheGroup’sinvestmentproperties,adjustmentsaremadebythevaluerswhereappropriatetothevariablesused. Changesinassumptionsrelatingtothesevariablescouldpositivelyornegativelyimpactthereportedfairvalueoftheproperties. (e) Transfers into and transfers out of levels TheGroup’spolicyistorecognisetransfersintoandtransfersoutoflevelsasoftheendofeachhalfyearreportingperiodexceptfor materialtransferswhicharerecognisedasofthedateoftheeventorchangeincircumstancesthatcausedthetransfer.Transfersare deemedtohaveoccurredwhenthereisamaterialchangeintheobservedvaluationinputsorachangeintheleveloftradingactivities ofthesecurities. Duringtheyear,thetransfersbetweenlevelswithintheGroup’sportfoliowereprimarilytransfersfromlevel1tolevel2of £908millionandtransfersfromlevel2tolevel1of£976million.Thesetransferswhichrelatetoequitysecuritiesanddebtsecuritiesarose toreflectthechangeintheobservedvaluationinputsandincertaincases,thechangeintheleveloftradingactivitiesofthesecurities. Inaddition,thetransfersintolevel3duringtheyearwere£8millionandthetransfersoutoflevel3were£30million.Thesetransfers wereprimarilybetweenlevels3and2forderivativeliabilities. (f) Valuation processes applied by the Group TheGroup’svaluationpolicies,proceduresandanalysesforinstrumentscategorisedaslevel3areoverseenbybusinessunitcommittees aspartoftheGroup’swiderfinancialreportinggovernanceprocesses.Theproceduresundertakenincludeapprovalofvaluation methodologies,verificationprocesses,andresolutionofsignificantorcomplexvaluationissues.InundertakingtheseactivitiestheGroup makesuseoftheextensiveexpertiseofitsassetmanagementfunctions.Inaddition,theGrouphasminimumstandardsforindependent priceverificationtoensurevaluationaccuracyisregularlyindependentlyverified.Adherencetothispolicyismonitoredacrossthe businessunits. 228 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC3.2 Debt securities ThisnoteprovidesanalysisoftheGroup’sdebtsecurities,includingasset-backedsecuritiesandsovereigndebtsecurities. WiththeexceptionofcertaindebtsecuritiesforUSinsuranceoperationsclassifiedas‘available-for-sale’underIAS39asdisclosed innotesC3.2(b)to(d)below,theGroup’sdebtsecuritiesarecarriedatfairvaluethroughprofitorloss. (a) Credit rating Debtsecuritiesareanalysedbelowaccordingtoexternalcreditratingsissued,withequivalentratingsissuedbydifferentratings agenciesgroupedtogether.Standard&Poor’sratingshavebeenusedwhereavailable,ifthisisn’tthecaseMoody’sandthenFitchhave beenusedasalternatives.FortheUS,NAICratingshavealsobeenusedwhererelevant.Inthetablebelow,AAAisthehighestpossible rating.InvestmentgradefinancialassetsareclassifiedwithintherangeofAAAtoBBB-ratings.Financialassetswhichfalloutsidethis rangeareclassifiedasbelowBBB-.Debtsecuritieswithnoexternalcreditratingareclassifiedas‘Other’. Asia With-profits Unit-linked Non-linkedshareholder- backed Assetmanagement US Non-linkedshareholder- backed UKandEurope With-profits Unit-linked Non-linkedshareholder- backed Otheroperations Totaldebtsecurities Asia With-profits Unit-linked Non-linkedshareholder- backed US Non-linkedshareholder- backed UKandEurope With-profits Unit-linked Non-linkedshareholder- backed Otheroperations Totaldebtsecurities AAA AA+ to AA- A+ to A- 2,873 817 1,034 11 12,379 100 3,552 – 4,142 492 3,717 60 31 Dec 2018 £m BBB+ to BBB- 3,760 1,431 2,934 – 678 7,383 10,286 14,657 6,890 1,041 3,007 619 9,332 2,459 6,413 1,089 11,779 2,215 4,651 151 14,712 3,501 1,515 41 Below BBB- Other Total 1,747 426 2,202 – 1,429 2,891 395 158 49 2,303 715 1,144 – 27,204 3,981 14,583 71 7,161 41,594 8,194 901 5,902 18 53,798 10,512 21,646 1,967 16,970 42,707 37,493 42,551 9,297 26,338 175,356 AAA AA+ to AA- A+ to A- 2,504 528 10,641 103 990 2,925 3,846 510 3,226 31 Dec 2017 £m BBB+ to BBB- 3,234 1,429 2,970 368 6,492 670 5,118 742 17,412 6,352 9,378 2,732 11,005 1,264 44,400 9,578 12,311 11,666 1,308 9,625 182 39,941 12,856 1,793 3,267 67 37,927 Below BBB- Other Total 1,810 372 1,879 1,000 2,877 91 258 36 8,323 2,397 565 1,053 5,769 7,392 117 6,062 16 24,432 3,507 13,043 35,378 50,661 6,711 35,335 2,307 23,371 171,374 Thecreditratings,informationordatacontainedinthisreportwhichareattributedandspecificallyprovidedbyStandard&Poor’s,Moody’sandFitchSolutionsandtheirrespective affiliatesandsuppliers(‘ContentProviders’)isreferredtohereasthe‘Content’.ReproductionofanyContentinanyformisprohibitedexceptwiththepriorwrittenpermissionofthe relevantparty.TheContentProvidersdonotguaranteetheaccuracy,adequacy,completeness,timelinessoravailabilityofanyContentandarenotresponsibleforanyerrorsoromissions (negligentorotherwise),regardlessofthecause,orfortheresultsobtainedfromtheuseofsuchContent.TheContentProvidersexpresslydisclaimliabilityforanydamages,costs, expenses,legalfees,orlosses(includinglostincomeorlostprofitandopportunitycosts)inconnectionwithanyuseoftheContent.Areferencetoaparticularinvestmentorsecurity,a ratingoranyobservationconcerninganinvestmentthatispartoftheContentisnotarecommendationtobuy,sellorholdanysuchinvestmentorsecurity,nordoesitaddressthe suitabilityofaninvestmentorsecurityandshouldnotbereliedonasinvestmentadvice. www.prudential.co.uk AnnualReport2018 Prudential plc 229 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC3 Assets and liabilities continued C3.2 Debt securities continued Securitieswithcreditratingsclassifiedas‘Other’canbefurtheranalysedasfollows: Asia – non-linked shareholder-backed Internallyrated: Governmentbonds Corporatebonds–ratedasinvestmentgradebylocalexternalratingsagencies Other TotalAsianon-linkedshareholder-backed 31 Dec 2018 £m 31 Dec 2017 £m 36 978 130 25 959 69 1,144 1,053 31 Dec 2017 £m Total Total 31 Dec 2018 £m Mortgage -backed securities Other securities US ImplicitratingsofotherUSdebtsecuritiesbasedonNAIC*valuations (seebelow) NAIC1 NAIC2 NAIC3-6 TotalUS† 2,148 2 2 2,152 2,858 2,116 35 5,009 5,006 2,118 37 7,161 3,918 1,794 57 5,769 *TheSecuritiesValuationOfficeoftheNAICclassifiesdebtsecuritiesintosixqualitycategoriesrangingfromClass1(thehighest)toClass6(thelowest).Performingsecuritiesare designatedasClasses1to5andsecuritiesinorneardefaultaredesignatedClass6. †Mortgage-backedsecuritiestotalling£1,947millionat31December2018havecreditratingsissuedbyStandard&Poor’sofBBB-oraboveandhencearedesignatedasinvestmentgrade. Othersecuritiestotalling£4,974millionat31December2018withNAICratings1or2arealsodesignatedasinvestmentgrade. UK and Europe Government AAAtoA- BBBtoB- BelowB-orunrated TotalUKandEurope (b) Additional analysis of US insurance operations debt securities Corporateandgovernmentsecurityandcommercialloans: Government PubliclytradedandSECRule144Asecurities* Non-SECRule144Asecurities Asset-backedsecurities(see note (e)) TotalUSdebtsecurities† 31 Dec 2018 £m 31 Dec 2017 £m 8,150 3,034 3,813 7,994 3,141 2,436 14,997 13,571 31 Dec 2018 £m 31 Dec 2017 £m 5,465 26,196 6,329 3,604 41,594 4,835 22,849 4,468 3,226 35,378 *A1990SECrulethatfacilitatestheresaleofprivatelyplacedsecuritiesunderRule144AthatarewithoutSECregistrationtoqualifiedinstitutionalinvestors.Therulewasdesignedto developamoreliquidandefficientinstitutionalresalemarketforunregisteredsecurities. †DebtsecuritiesforUSoperationsincludedinthestatementoffinancialpositioncomprise: Available-for-sale Fairvaluethroughprofitorloss TotalUSdebtsecurities 31 Dec 2018 £m 31 Dec 2017 £m 40,849 745 41,594 35,293 85 35,378 Realisedgainsandlosses,includingimpairments,recordedintheincomestatementareasshowninnoteB1.2ofthisreport. 230 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continued (c) Movements in unrealised gains and losses on Jackson available-for-sale securities Themovementinthestatementoffinancialpositionvaluefordebtsecuritiesclassifiedasavailable-for-salewasfromanetunrealisedgain of£1,205milliontoanetunrealisedlossof£414millionasanalysedinthetablebelow. Assetsfairvaluedatbelowbookvalue Bookvalue* Unrealisedgain(loss) Fairvalue(asincludedinstatementoffinancialposition) Assetsfairvaluedatorabovebookvalue Bookvalue* Unrealisedgain(loss) Fairvalue(asincludedinstatementoffinancialposition) Total Bookvalue* Netunrealisedgain(loss) Fairvalue(asincludedinthefootnoteaboveintheoverviewtableandthe statementoffinancialposition) *Bookvaluerepresentscost/amortisedcostofthedebtsecurities. †TranslatedattheaveragerateofUS$1.3352:£1.00. Reflected as part of movement in other comprehensive income Foreign exchange translation Changes in unrealised appreciation†  £m  £m 2018  £m 25,330 (925) 24,405 15,933 511 16,444 41,263 (414) 40,849 (43) (776) 41 (841) (2) (1,617) 2017  £m 6,325 (106) 6,219 27,763 1,311 29,074 34,088 1,205 35,293 (d) US debt securities classified as available-for-sale in an unrealised loss position (i) Fair value of securities as a percentage of book value Thefairvalueofthedebtsecuritiesinagrossunrealisedlosspositionforvariouspercentagesofbookvalue: Between90%and100% Between80%and90% Below80%: Otherasset-backedsecurities Corporatebonds Total (ii) Unrealised losses by maturity of security 1yearto5years 5yearsto10years Morethan10years Mortgage-backedandotherdebtsecurities Total 31 Dec 2018 £m 31 Dec 2017 £m Fair value Unrealised loss 23,662 707 – 36 36 24,405 (809) (104) – (12) (12) (925) Fair value 6,170 36 10 3 13 Unrealised loss (95) (6) (4) (1) (5) 6,219 (106) 31 Dec 2018 £m 31 Dec 2017 £m (72) (436) (372) (45) (925) (7) (41) (39) (19) (106) www.prudential.co.uk AnnualReport2018 Prudential plc 231 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC3 Assets and liabilities continued C3.2 Debt securities continued (iii) Age analysis of unrealised losses for the periods indicated Theageanalysisofalltheunrealisedlossesintheportfoliobyreferencetothelengthoftimethesecuritieshavebeeninanunrealised lossposition: 31 Dec 2018 £m 31 Dec 2017 £m Lessthan6months 6monthsto1year 1yearto2years 2yearsto3years Morethan3years Total Non- investment grade Investment grade (20) (22) (10) – (2) (54) (141) (440) (142) (123) (25) (871) Total (161) (462) (152) (123) (27) (925) Non- investment grade Investment grade (4) (1) – (1) – (6) (31) (4) (49) (6) (10) Total (35) (5) (49) (7) (10) (100) (106) Theageanalysisasat31December,ofthesecuritieswhosefairvalueswerebelow80percentofthebookvalue: Age analysis Lessthan3months 3monthsto6months Morethan6months Total 31 Dec 2018 £m 31 Dec 2017 £m Fair value Unrealised loss Fair value Unrealised loss 32 2 2 36 (10) (1) (1) (12) 2 1 10 13 – (1) (4) (5) (e) Asset-backed securities TheGroup’sholdingsinAsset-BackedSecurities(ABS),whichcompriseResidentialMortgage-BackedSecurities(RMBS),Commercial Mortgage-BackedSecurities(CMBS),CollateralisedDebtObligations(CDO)fundsandotherasset-backedsecuritiesareasfollows: Shareholder-backed business Asiaoperations note (i) USoperations note (ii) UKandEuropeoperations(2018:42%AAA,13%AA) note (iii) Otheroperations note (iv) With-profits business Asiaoperations note (i) UKandEuropeoperations(2018:66%AAA,12%AA) note (iii) Total 31 Dec 2018 £m 31 Dec 2017 £m 121 3,604 1,406 445 5,576 235 5,270 5,505 118 3,226 1,070 589 5,003 233 5,658 5,891 11,081 10,894 232 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedNotes (i)  Asia operations TheAsiaoperations’exposuretoasset-backedsecuritiesisprimarilyheldbythewith-profitsbusinesses.Ofthe£235million(31December2017:£233million),99.8percent (2017:98.2percent)areinvestmentgrade. (ii) US operations  USoperations’exposuretoasset-backedsecuritiesat31Decembercomprises: RMBS Sub-prime(2018:1%AAA,6%AA,2%A) Alt-A(2018:3%AAA,42%A) Primeincludingagency(2018:14%AAA,62%AA,10%A) CMBS(2018:80%AAA,15%AA,2%A) CDOfunds(2018:13%AA,24%A),including£nilexposuretosub-prime OtherABS(2018:20%AAA,14%AA,49%A),including£77millionexposuretosub-prime Total 31 Dec 2018 £m 31 Dec 2017 £m 96 105 441 1,945 13 1,004 3,604 112 126 440 1,579 28 941 3,226 (iii) UK and Europe operations  Themajorityofholdingsoftheshareholder-backedbusinessareUKsecuritiesandrelatetoPAC’sannuitybusiness.Oftheholdingsofthewith-profitsbusinesses,£1,823million (31December2017:£1,913million)relatestoexposuretotheUSmarketswiththeremainingexposurebeingprimarilytotheUKmarket. (iv) Other operations  Otheroperations’exposuretoasset-backedsecuritiesisheldbyPrudentialCapitalwithnosub-primeexposure.Ofthe£445million,99percent(31December2017:96percent) aregradedAAA. (f) Group sovereign debt and bank debt exposure TheGroupexposuresheldbytheshareholder-backedbusinessandwith-profitsfundsinsovereigndebtsandbankdebtsecuritiesare analysedasfollows: Exposure to sovereign debts  Italy Spain France Germany* OtherEurozone Total Eurozone UnitedKingdom UnitedStates† Other,includingAsia Total 31 Dec 2018 £m 31 Dec 2017 £m Shareholder- backed business With-profits funds Shareholder- backed business With-profits funds – 36 – 239 103 378 3,226 5,647 5,142 14,393 57 18 50 281 34 440 3,013 11,858 2,745 18,056 58 34 23 693 82 890 5,918 5,078 4,638 16,524 63 18 38 301 31 451 3,287 10,156 2,143 16,037 *Includingbondsguaranteedbythefederalgovernment. †TheexposuretotheUnitedStatessovereigndebtcomprisesholdingsoftheUS,theUKandEuropeandAsiainsuranceoperations. www.prudential.co.uk AnnualReport2018 Prudential plc 233 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C3 Assets and liabilities continued C3.2 Debt securities continued Exposure to bank debt securities Shareholder-backed business Covered Senior Total Tier 1 Tier 2 Total Senior debt Subordinated debt 31 Dec 2018 £m Spain France Germany Netherlands OtherEurozone Total Eurozone UnitedKingdom UnitedStates Other,includingAsia Total With-profits funds Italy Spain France Germany Netherlands OtherEurozone Total Eurozone UnitedKingdom UnitedStates Other,includingAsia Total 42 20 30 – 15 107 550 – – 657 – – 6 140 – – 146 909 – 575 1,630 64 119 – 69 2 254 623 2,614 759 4,250 38 17 250 46 253 74 678 850 2,418 1,459 5,405 106 139 30 69 17 361 1,173 2,614 759 4,907 38 17 256 186 253 74 824 1,759 2,418 2,034 7,035 – 14 6 3 – 23 9 1 109 142 – – 1 14 12 – 27 2 1 339 369 – 3 89 1 – 93 164 52 369 678 – – 95 29 1 – 125 433 311 452 – 17 95 4 – 116 173 53 478 820 – – 96 43 13 – 152 435 312 791 1,321 1,690 31 Dec 2017 £m Total 68 86 117 71 15 357 1,382 2,619 1,163 5,521 31 16 286 180 199 27 739 1,938 2,518 2,531 7,726 Total 106 156 125 73 17 477 1,346 2,667 1,237 5,727 38 17 352 229 266 74 976 2,194 2,730 2,825 8,725 Thetablesaboveexcludeassetsheldtocoverlinkedliabilitiesandthoseoftheconsolidatedunittrustsandsimilarfunds.Inaddition, thetablesaboveexcludetheproportionateshareofsovereigndebtholdingsoftheGroup’sjointventureoperations. (g) Impairment of US available-for-sale debt securities and other financial assets InaccordancewiththeGroup’saccountingpolicysetoutinnoteA3.1,impairmentreviewswereperformedforavailable-for-sale securitiesandloansandreceivables. Duringtheyearended31December2018,acreditforrecoveriesnetofimpairmentof£13million(2017:creditof£1million)was recognised.Thisincludes£15million(2017:£8million)foravailable-for-salesecuritiesheldbyJackson,offsetbyachargeof£2million (2017:£7million)forloansandreceivablesheldacrosstheGroup. Jackson,withthesupportofinternalcreditanalysts,regularlymonitorsandreportsonthecreditqualityofitsholdingsofdebt securities.Inaddition,thereisaperiodicreviewofitsinvestmentsonacase-by-casebasistodeterminewhetheranydeclineinfairvalue representsanimpairment.Investmentsinstructuredsecuritiesaresubjecttoareviewoftheirfutureestimatedcashflows,including expectedandstresscasescenarios,toidentifypotentialshortfallsincontractualpayments(bothinterestandprincipal).Impairment chargesarerecordedonstructuredsecuritieswhentheCompanyforecastsacontractualpaymentshortfall.Situationswheresuch ashortfallwouldnotleadtoarecognitionofalossarerare.Theimpairmentlossreflectsthedifferencebetweenthefairvalueand bookvalue. In2018,theGrouprealisedgrosslossesonsalesofavailable-for-salesecuritiesof£43million(2017:£155million)with49percent (2017:97percent)oftheselossesrelatedtothedisposaloffixedmaturitysecuritiesofthetop10individualissuers,whichweredisposed oftolimitfuturecreditlossexposure.Ofthe£43million(2017:£155million),£4million(2017:£3million)relatestolossesonsalesof impairedanddeterioratingsecurities. 234 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedTheeffectofchangesinthekeyassumptionsthatunderpintheassessmentofwhetherimpairmenthastakenplacedependsonthe factorsdescribedinnoteA3.1.Akeyindicatorofwhethersuchimpairmentmayariseinfuture,andthepotentialamountsatrisk,isthe profileofgrossunrealisedlossesforfixedmaturitysecuritiesaccountedforonanavailable-for-salebasisbyreferencetothetimeperiods bywhichthesecuritieshavebeenheldcontinuouslyinanunrealisedlosspositionandbyreferencetothematuritydateofthesecurities concerned. For2018,theamountofgrossunrealisedlossesforfixedmaturitysecuritiesclassifiedasavailable-for-saleunderIFRSinanunrealised losspositionwas£925million(2017:£106million).NoteB1.2providesfurtherdetailsontheimpairmentchargesandunrealisedlossesof Jackson’savailable-for-salesecurities. C3.3 Loans portfolio (a) Overview of loans portfolio Loansareaccountedforatamortisedcostnetofimpairmentexceptfor: — CertainmortgageloanswhichhavebeendesignatedatfairvaluethroughprofitorlossoftheUKandEuropeinsuranceoperationsas thisloanportfolioismanagedandevaluatedonafairvaluebasis;and — CertainpolicyloansoftheUSinsuranceoperationsthatareheldtobackliabilitiesforfundswithheldunderreinsurancearrangements andarealsoaccountedonafairvaluebasis. Theamountsincludedinthestatementoffinancialpositionareanalysedasfollows:  31 Dec 2018 £m 31 Dec 2017 £m Mortgage loans* Policy loans† Other loans‡ Asia With-profits Non-linkedshareholder-backed – 156 727 226 65 203 Total 792 585 Mortgage loans* Policy loans† Other loans‡ – 177 613 216 112 199 Total 725 592 US Non-linkedshareholder-backed UKandEurope With-profits Non-linkedshareholder-backed Otheroperations Totalloanssecurities 7,385 3,681 – 11,066 6,236 3,394 – 9,630 2,461 1,655 – 3 – – 11,657 4,637 1,389 59 – 1,716 3,853 1,714 – 2,441 1,681 – 4 – – 18,010 10,535 4,227 1,823 37 109 2,280 4,268 1,718 109 17,042 *Allmortgageloansaresecuredbyproperties. †IntheUS£2,783million(31December2017:£2,512million)policyloansarebackingliabilitiesforfundswithheldunderreinsurancearrangementsandareaccountedforatfairvalue throughprofitorloss.Allotherpolicyloansareaccountedforatamortisedcost,lessanyimpairment. ‡OtherloansheldinUKwith-profitsfundsarecommercialloansandcomprisemainlysyndicatedloans. (b) Additional information on US mortgage loans IntheUS,mortgageloansareallcommercialmortgageloansthataresecuredbythefollowingpropertytypes:industrial,multi-family residential,suburbanoffice,retailorhotel.Theaverageloansizeis£14.0million(2017:£12.6million).Theportfoliohasacurrent estimatedaverageloantovalueof53percent(2017:55percent). Jacksonhadnomortgageloanswherethecontractualtermsoftheagreementshadbeenrestructuredattheendofboth2018and2017. (c) Additional information on UK mortgage loans TheUKwith-profitsfundinvestsinanentitythatholdsaportfolioofbuy-to-letmortgageloans.Thevehiclefinanceditsacquisitions throughtheissueofdebtinstruments,largelytoexternalparties,securitisedupontheloansacquired.Thesethird-partyborrowingshave norecoursetoanyotherassetsoftheGroupandtheGroup’sexposureislimitedtotheamountinvestedbytheUKwith-profitsfund. Bycarryingvalue,£1,237millionofthe£1,655million(31December2017:£1,267millionof£1,681million)mortgageloansheldby theUKshareholder-backedbusinessrelatestolifetime(equityrelease)mortgagebusinesswhichhasanaverageloantopropertyvalue of33percent(31December2017:31percent). www.prudential.co.uk AnnualReport2018 Prudential plc 235 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC3 Assets and liabilities continued C3.4 Financial instruments – additional information C3.4(a) Financial risk (i) Liquidity analysis Contractual maturities of financial liabilities on an undiscounted cash flow basis Thefollowingtablesetsoutthecontractualmaturitiesforapplicableclassesoffinancialliabilities,excludingderivativeliabilitiesand investmentcontractsthatareseparatelypresented.Thefinancialliabilitiesareincludedinthecolumnrelatingtothecontractual maturitiesattheundiscountedcashflows(includingcontractualinterestpayments)duetobepaidassumingconditionsareconsistent withthoseofyearend. Total carrying value 1 year or less After 1 year to 5 years After 5 years to 10 years After 10 years to 15 years After 15 years to 20 years Over 20 years No stated maturity Total 31 Dec 2018 £m Financial liabilities Corestructuralborrowings ofshareholder-financed businesses C6.1 Operationalborrowings attributableto shareholder-financed businesses C6.2 Borrowingsattributableto with-profitsfunds C6.2 Obligationsunderfunding, securitieslendingand saleandrepurchase agreements Accruals,deferredincome andotherliabilities Netassetvalueattributable tounitholdersof consolidatedunittrusts andsimilarfunds Financial liabilities Corestructuralborrowings ofshareholder-financed businesses C6.1 Operationalborrowings attributableto shareholder-financed businesses C6.2 Borrowingsattributableto with-profitsfunds C6.2 Obligationsunderfunding, securitieslendingand saleandrepurchase agreements Accruals,deferredincome andotherliabilities Netassetvalueattributable tounitholdersof consolidatedunittrusts andsimilarfunds 7,664 298 1,759 1,526 1,843 1,070 6,573 2,924 15,993 998 3,940 839 701 91 1,246 6,989 6,989 – 15,248 10,844 470 68 719 – 71 – – – 274 142 2,086 – – – 998 5,168 6,989 – – – 90 109 352 3,535 15,471 11,651 11,651 – – – – – – 11,651 Total 46,490 31,322 3,566 2,384 2,207 1,321 9,011 6,459 56,270 Total carrying value 1 year or less After 1 year to 5 years After 5 years to 10 years After 10 years to 15 years After 15 years to 20 years Over 20 years No stated maturity Total 31 Dec 2017 £m 6,280 473 784 1,350 1,389 576 3,324 3,160 11,056 1,791 1,130 3,716 905 5,662 5,662 14,185 10,088 597 922 – 469 8,889 8,889 – 69 32 – 68 – – 29 – 85 – – 29 – 106 – 711 – – 1,796 1,810 104 3,831 – – 5,662 320 3,267 14,403 – – 8,889 5,454 6,531 45,637 Total 40,523 27,147 2,772 1,519 1,503 236 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedMaturity analysis of derivatives Thefollowingtableshowsthegrossandnetderivativepositionstogetherwithamaturityprofileofthenetderivativeposition: Carrying value of net derivative £m Maturity profile of net derivative position £m Derivative assets Derivative liabilities 3,494 4,801 (3,506) (2,755) Net derivative position (12) 2,046 1 year or less 292 2,359 After 1 year to 3 years (8) (16) After 3 years to 5 years (4) (9) After 5 years 30 (1) Total 310 2,333 2018 2017 Themajorityofderivativeassetsandliabilitieshavebeenincludedatfairvaluewithintheoneyearorlesscolumn,representingthebasis onwhichtheyaremanaged(ietomanageprincipallyassetorliabilityvalueexposures).TheGrouphasnocashflowhedgesand,in general,contractualmaturitiesarenotconsideredessentialforanunderstandingofthetimingofthecashflowsfortheseinstruments. Theonlyexceptioniscertainidentifiedinterestrateswapswhichareexpectedtobehelduntilmaturityforthepurposesofmatching cashflowsonseparatelyheldassetsandliabilities.Fortheseinstrumentstheundiscountedcashflows(includingcontractualinterest amounts)duetobepaidundertheswapcontractassumingconditionsareconsistentwiththoseatyearendareincludedinthecolumn relatingtothecontractualmaturityofthederivative. Maturity analysis of investment contracts Thetablebelowshowsthematurityprofileforinvestmentcontractsonundiscountedcashflowprojectionsofexpectedbenefit payments. 31 Dec 2018 31Dec2017 1 year or less 8 8 After 1 year to 5 years 31 29 After 5 years to 10 years After 10 years to 15 years After 15 years to 20 years 29 27 20 19 12 13 Over 20 years 17 14 Total undis- counted value 117 110 Total carrying value 87 83 £billion Theundiscountedcashflowinmaturityprofileaboveexcludescertaincorporateunit-linkedbusinesswithgrosspolicyholderliabilities withacarryingvalueof£11billion(31December2017:£12billion)whichhavenostatedmaturitybutwhicharerepayableondemand. Mostinvestmentcontractshaveoptionstosurrenderearly,oftensubjecttosurrenderorotherpenalties.Therefore,mostcontracts canbesaidtohaveacontractualmaturityoflessthanoneyear,buttheadditionalchargesandtermofthecontractsmeantheseare unlikelytobeexercisedinpracticeandthemoreusefulinformationistopresentinformationonexpectedpayment. ThevastmajorityoftheGroup’sfinancialassetsareheldtobacktheGroup’spolicyholderliabilities.Althoughasset/liabilitymatching isanimportantcomponentofmanagingpolicyholderliabilities(boththoseclassifiedasinsuranceandthoseclassifiedasinvestments), thisprofileismainlyrelevantformanagingmarketriskratherthanliquidityrisk.Withineachbusinessunitthisasset/liabilitymatchingis performedonaportfolio-by-portfoliobasis. Intermsofliquidityrisk,alargeproportionofthepolicyholderliabilitiescontaindiscretionarysurrendervaluesorsurrendercharges, meaningthatmanyoftheGroup’sliabilitiesareexpectedtobeheldforthelongterm.MuchoftheGroup’sinvestmentportfoliosarein marketablesecurities,whichcanthereforebeconvertedquicklytoliquidassets. Forthereasonsprovidedabove,ananalysisoftheGroup’sassetsbycontractualmaturityisnotconsideredmeaningfultoevaluatethe natureandextentoftheGroup’sliquidityrisk. (ii) Credit risk TheGroup’smaximumexposuretocreditriskoffinancialinstrumentsbeforeanyallowanceforcollateralorallocationoflossesto policyholdersisrepresentedbythecarryingvalueoffinancialinstrumentsonthebalancesheetthathaveexposurestocreditrisk comprisingcashandcashequivalents,deposits,debtsecurities,loansandderivativeassets,andotherdebtors,thecarryingvalueof whicharedisclosedatthestartofthisnoteandnoteC3.4(b)belowforderivativeassets.Thecollateralinplaceinrelationtoderivativesis describedinnoteC3.4(c)below.NoteC3.3describesthesecurityfortheloansheldbytheGroup.TheGroup’sexposuretocreditriskis furtherdiscussedinnoteC7below.  Ofthetotalloansandreceivablesheld,£27million(31December2017:£23million)arepasttheirduedatebutarenotimpaired.Of thetotalpastduebutnotimpaired,£22millionarelessthanoneyearpasttheirduedate(31December2017:£17million).TheGroup expectsfullrecoveryoftheseloansandreceivables. Financialassetsthatwouldhavebeenpastdueorimpairedhadthetermsnotbeenrenegotiatedamountedto£23million (31December2017:£22million). Inaddition,during2018and2017theGroupdidnottakepossessionofanyothercollateralheldassecurity. FurtherdetailsofcollateralandpledgesareprovidedinnoteC3.4(c)below. www.prudential.co.uk AnnualReport2018 Prudential plc 237 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC3 Assets and liabilities continued C3.4 Financial instruments – additional information continued C3.4(a) Financial riskcontinued (iii) Foreign exchange risk Asat31December2018,theGroupheld26percent(31December2017:24percent)and13percent(31December2017:16percent) ofitsfinancialassetsandfinancialliabilitiesrespectively,incurrencies,mainlyUSdollarandEuro,otherthanthefunctionalcurrencyof therelevantbusinessunit. Ofthesefinancialassets,49percent(31December2017:52percent)areheldbytheUKwith-profitsfund,allowingthefundto obtainexposuretoforeignequitymarkets. Ofthesefinancialliabilities,28percent(31December2017:28percent)areheldbytheUKwith-profitsfund,mainlyrelatingto foreigncurrencyborrowings. Theexchangerisksinherentintheseexposuresaremitigatedthroughtheuseofderivatives,mainlyforwardcurrencycontracts(note C3.4(b)below).  Theamountofexchangegainrecognisedintheincomestatementin2018,exceptforthosearisingonfinancialinstrumentsmeasured atfairvaluethroughprofitorloss,is£281million(2017:£112millionlossmainlyarisingoninvestmentsoftheUKwith-profitsfund). C3.4(b) Derivatives and hedging Derivatives TheGroupentersintoavarietyofexchangetradedandover-the-counterderivativefinancialinstruments,includingfutures,options, forwardcurrencycontractsandswapssuchasinterestrateswaps,cross-currencyswaps,swaptionsandcreditdefaultswaps. Allover-the-counterderivativetransactions,withtheexceptionofsomeAsiatransactions,areconductedunderstandardisedISDA (InternationalSwapsandDerivativesAssociationInc)masteragreementsandtheGrouphascollateralagreementsbetweenthe individualGroupentitiesandrelevantcounterpartiesinplaceundereachofthesemarketmasteragreements. UnderArticle11oftheEuropeanMarketInfrastructureRegulationonderivatives,centralcounterpartiesandtraderepositories (‘EMIR’)andCommissionDelegatedRegulation(EU)2016/2251supplementingEMIR,marketparticipantstransactinginnon-cleared OTCderivativesarerequiredtoexchangecollateraltocovervariationandinitialmargin.However,tradesbetweencounterparties belongingtothesamegroupareexemptfromthesemarginrequirementssubjecttocertaincriteria. PrudentialCapitalplc(LegalEntityIdentifierreference(‘LEI’)CHW8NHK268SFPTV63Z64)hasenteredintosuchderivative agreementswiththefollowingsixentitiesintheGroup.Thesecounterpartypairingsmeetthecriteriatobeeligibleforintra-group exemptionstothemarginrequirementsandhavebeenapprovedbytheFinancialConductAuthority: 31 Dec 2018 Legal Entity Identifier (LEI) Relationship between parties Type of exemption Aggregate notional of OTC derivatives contract £m Counterparty Prudentialplc PrudentialHoldingsLimited Prudential(USHoldCo1)Limited 5493001Z3ZE83NG K8Y12 549300JVAI8CZD4 HD451 549300JNYGDP2X OLWR47 PrudentialCorporationHoldingsLimited 549300KDOPLFHA PrudentialLifetimeMortgagesLimited PrudentialDistributionLimited W51H26 5493001GSK4HF84 IOB02 549300I8LYOK91H BX439 Partofthesamegroup holdingcompany Partofthesamegroup holdingcompany Partofthesamegroup holdingcompany Partofthesamegroup holdingcompany Partofthesamegroup holdingcompany Partofthesamegroup holdingcompany Full Full Full Full Full Full 3,633 56 2,717 927 37 7 238 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedDerivativesareusedforefficientportfoliomanagementtoobtaincosteffectivemanagementofexposuretovariousmarketsin accordancewiththeGroup’sinvestmentstrategiesandtomanageexposuretointerestrate,currency,creditandotherbusinessrisks. TheGroupalsousesinterestratederivativestoreduceexposuretointerestratevolatility.Inparticular: — UKwith-profitsfundsusederivativesforefficientportfoliomanagementorreductionininvestmentrisks.ForUKannuitybusiness derivativesareusedtoassistwithassetandliabilitycashflowmatching; — USoperationsandsomeoftheUKandEuropeoperationsholdlargeamountsofinterest-ratesensitiveinvestmentsthatcontaincredit risksonwhichacertainlevelofdefaultsisexpected.Thesebusinesseshavepurchasedsomeswaptionstomanagethedefaultrisk oncertainunderlyingassetsandhencereducetheamountofregulatorycapitalheldtosupporttheassets;and — Someproducts,especiallyintheUS,haveguaranteefeatureslinkedtoequityindices.Amismatchbetweenguaranteedproduct liabilitiesandtheperformanceoftheunderlyingassetsexposestheGrouptoequityindexrisk.Inordertomitigatethisrisk,the relevantbusinessunitspurchaseswaptions,equityoptionsandfuturestobettermatchassetperformancewithliabilitiesunder equity-indexedproducts. Hedging TheGrouphasformallyassessedanddocumentedtheeffectivenessofthefollowingnetinvestmenthedgesunderIAS39.At 31December2018,theGrouphasdesignatedperpetualsubordinatedcapitalsecuritiestotallingUS$3.7billion(31December2017: US$4.3billion)asanetinvestmenthedgetohedgethecurrencyrisksrelatedtothenetinvestmentinJackson.Thecarryingvalueofthe subordinatedcapitalsecuritieswas£2,909millionasat31December2018(31December2017:£3,140million).Theforeignexchange lossof£199million(2017:gainof£325million)ontranslationoftheborrowingstopoundssterlingatthestatementoffinancialposition dateisrecognisedinthetranslationreserveinshareholders’equity.Thisnetinvestmenthedgewas100percenteffective. TheGrouphasnocashflowhedgesorfairvaluehedgesinplace. C3.4(c) Derecognition, collateral and offsetting Securities lending and reverse repurchase agreements TheGrouphasenteredintosecuritieslending(includingrepurchaseagreements)wherebyblocksofsecuritiesareloanedtothird parties,primarilymajorbrokeragefirms.Typically,thevalueofcollateralassetsgrantedtotheGroupinthesetransactionsisinexcess ofthevalueofsecuritieslent,withtheexcessdeterminedbythequalityofthecollateralassetsgranted.Collateralrequirementsare calculatedonadailybasis.TheloanedsecuritiesarenotremovedfromtheGroup’sconsolidatedstatementoffinancialposition,rather theyareretainedwithintheappropriateinvestmentclassification.Collateraltypicallyconsistsofcash,debtsecurities,equitysecurities andlettersofcredit. At31December2018,theGrouphas£8,278million(31December2017:£8,232million)oflentsecuritiesandassetssubjectto repurchaseagreements,ofwhich£8,245million(31December2017:£8,182million)relatedtotheUKwith-profitsfund.Thecashand securitiescollateralheldorpledgedundersuchagreementswere£8,750million(31December2017:£8,733million)ofwhich £8,662million(31December2017:£8,679million)washeldbytheUKwith-profitsfund. At31December2018,theGrouphadenteredintoreverserepurchasetransactionsunderwhichitpurchasedsecuritiesandhad takenontheobligationtoresellthesecurities.Thefairvalueofthecollateralheldinrespectofthesetransactionswas£10,633million (31December2017:£10,550million). Collateral and pledges under derivative transactions At31December2018,theGrouphadpledged£3,265million(31December2017:£2,302million)forliabilitiesandheldcollateralof £2,012million(31December2017:£3,958million)inrespectofover-the-counterderivativetransactions. Thesetransactionsareconductedundertermsthatareusualandcustomarytocollateralisedtransactionsincluding,whererelevant, standardsecuritieslendingandrepurchaseagreements. TheGrouphasenteredintocollateralarrangementsinrelationtoover-the-counterderivativetransactions,whichpermitsaleor re-pledgingofunderlyingcollateral.Duringtheyear,theGrouphasnotsoldanycollateralheld(2017:nil).Asof31December2018,the valueofcollateralre-pledgedbytheGroupamountedto£698million(31December2017:£852million).Allover-the-counterderivative transactions,withtheexceptionofsomeAsiatransactions,areconductedunderstandardisedInternationalSwapsandDerivatives Association(ISDA)masteragreements.Thecollateralmanagementforthesetransactionsisconductedundertheusualandcustomary termsandconditionssetoutintheCreditSupportAnnextotheISDAmasteragreement. Other collateral At31December2018,theGrouphadpledgedcollateralof£2,793million(31December2017:£3,412million)inrespectofother transactions.ThisprincipallyarisesfromJackson’smembershipoftheFederalHomeLoanBankofIndianapolisprimarilyforthepurpose ofparticipatinginthebank’scollateralisedloanadvanceprogrammewithshort-termandlong-termfundingfacilities. www.prudential.co.uk AnnualReport2018 Prudential plc 239 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC3 Assets and liabilities continued C3.4 Financial instruments – additional information continued C3.4(c) Derecognition, collateral and offsettingcontinued Offsetting assets and liabilities TheGroup’sderivativeinstruments,repurchaseagreementsandsecuritieslendingagreementsaresubjecttomasternetting arrangementsandcollateralarrangements.Amasternettingarrangementwithacounterpartycreatesarightofoffsetforamountsdueto andduefromthatsamecounterpartythatisenforceableintheeventofadefaultorbankruptcy.TheGrouprecognisesamountssubject tomasternettingarrangementsonagrossbasiswithintheconsolidatedbalancesheets. ThefollowingtablespresentthegrossandnetinformationabouttheGroup’sfinancialinstrumentssubjecttomasternetting arrangements: Financialassets: Derivativeassets Reverserepurchaseagreements Totalfinancialassets Financialliabilities: Derivativeliabilities Securitieslendingandrepurchaseagreements Totalfinancialliabilities Financialassets: Derivativeassets Reverserepurchaseagreements Totalfinancialassets Financialliabilities: Derivativeliabilities Securitieslendingandrepurchaseagreements Totalfinancialliabilities Gross amount included in the consolidated statement of financial position note(i) 31 Dec 2018 £m Related amounts not offset in the consolidated statement of financial position Financial instruments note(ii) Cash collateral Securities collateral note(iii) Net amount 3,229 11,597 14,826 (1,261) – (1,261) (1,687) – (1,687) (166) (11,606) (11,772) (3,189) (1,258) (4,447) 1,261 – 1,261 710 34 744 1,058 1,205 2,263 115 (9) 106 (160) (19) (179) Gross amount included in the consolidated statement of financial position note(i) 4,718 10,280 14,998 (2,301) (1,410) (3,711) 31 Dec 2017 £m Related amounts not offset in the consolidated statement of financial position Financial instruments note(ii) Cash collateral Securities collateral note(iii) Net amount (946) – (946) 946 – 946 (2,641) – (2,641) (984) (10,270) (11,254) 420 52 472 893 1,332 2,225 147 10 157 (42) (26) (68) Notes (i) (ii) (iii) TheGrouphasnotoffsetanyoftheamountsincludedintheconsolidatedstatementoffinancialposition. RepresentstheamountthatcouldbeoffsetundermasternettingorsimilararrangementswheretheGroupdoesnotsatisfythefullcriteriatooffsetontheconsolidatedstatement offinancialposition. Excludesinitialmarginamountsforexchange-tradedderivatives. Inthetablesabove,theamountsofassetsorliabilitiesincludedintheconsolidatedstatementoffinancialpositionwouldbeoffsetfirst byfinancialinstrumentsthathavetherightofoffsetundermasternettingorsimilararrangementswithanyremainingamountreduced bytheamountofcashandsecuritiescollateral.Theactualamountofcollateralmaybegreaterthanamountspresentedinthetables. 240 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC4 Policyholder liabilities and unallocated surplus Thenoteprovidesinformationofpolicyholderliabilitiesandunallocatedsurplusofwith-profitsfundsheldontheGroup’sstatement offinancialposition: C4.1 Movement and duration of liabilities C4.1(a) Group overview (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds At1January2017 Comprising: – Policyholder liabilities on the consolidated statement of financial position note (i) – Unallocated surplus of with-profits funds on the consolidated statement of financial position – Group's share of policyholder liabilities of joint ventures and associate note (ii) Premiums Surrenders Maturities/deaths Netflows Shareholders'transferspost-tax Investment-relateditemsandothermovements Foreignexchangetranslationdifferences At 31 December 2017/1 January 2018 Comprising: Asia  £m noteC4.1(b) US  £m noteC4.1(c) UK and Europe  £m noteC4.1(d) Total  £m 62,784 177,626 169,304 409,714 53,716 177,626 157,654 388,996 2,667 6,401 11,863 (3,079) (1,909) 6,875 (54) 8,182 (3,948) – – 15,219 (10,017) (2,065) 3,137 – 16,251 (16,290) 11,650 – 14,810 (6,939) (7,135) 736 (233) 11,146 113 14,317 6,401 41,892 (20,035) (11,109) 10,748 (287) 35,579 (20,125) 73,839 180,724 181,066 435,629 – Policyholder liabilities on the consolidated statement of financial position note (i) (excludes £32 million classified as unallocated to a segment) 62,898 180,724 167,589 411,211 – Unallocated surplus of with-profits funds on the consolidated statement of financial position – Group's share of policyholder liabilities of joint ventures and associate note (ii) ReclassificationofreinsuredUKannuitycontractsasheldforsale note (iii) Premiums Surrenders Maturities/deaths Netflows AdditionforclosedblockofgrouppayoutannuitiesintheUS note (iv) Shareholders'transferspost-tax Investment-relateditemsandothermovements Foreignexchangetranslationdifferences At 31 December 2018 Comprising: 3,474 7,467 – 13,187 (2,793) (1,978) 8,416 – (65) (2,784) 3,357 – – – 13,940 (12,141) (2,012) (213) 4,143 – (9,999) 10,945 13,477 – (10,858) 14,011 (6,780) (6,796) 435 – (259) (5,481) (14) 16,951 7,467 (10,858) 41,138 (21,714) (10,786) 8,638 4,143 (324) (18,264) 14,288 82,763 185,600 164,889 433,252 – Policyholder liabilities on the consolidated statement of financial position note (i) (excludes £39 million classified as unallocated to a segment) 72,107 185,600 151,555 409,262 – Unallocated surplus of with-profits funds on the consolidated statement of financial position – Group's share of policyholder liabilities of joint ventures and associate note (ii) Averagepolicyholderliabilitybalances note (v) 2018 2017 2,511 8,145 – – 13,334 – 15,845 8,145 75,309 182,126 162,287 419,722 65,241 179,175 162,622 407,038 www.prudential.co.uk AnnualReport2018 Prudential plc 241 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC4 Policyholder liabilities and unallocated surplus continued C4.1 Movement and duration of liabilities continued C4.1(a) Group overviewcontinued Notes (i) ThepolicyholderliabilitiesoftheAsiainsuranceoperationsof£72,107million(31December2017:£62,898million),showninthetableabove,isafterdeductingtheintra-group reinsuranceliabilitiescededbytheUKandEuropeinsuranceoperationsof£1,109million(31December2017:£1,235million)totheHongKongwith-profitsbusiness.Includingthis amounttotalAsiapolicyholderliabilitiesare£73,216million(31December2017:£64,133million). TheGroup’sinvestmentsinjointventuresandassociateareaccountedforonanequitymethodbasisintheGroup’sbalancesheet.TheGroup’sshareofthepolicyholderliabilities asshownaboverelatetolifebusinessesinChina,IndiaandoftheTakafulbusinessinMalaysia. ThereclassificationasheldforsaleofthereinsuredUKannuitybusinessthatwillbetransferredtoRothesaylifeoncethePartVIIprocessiscompletereflectsthevalueof policyholderliabilitiesheldat1January2018. InOctober2018,JacksonenteredintoanagreementwithJohnHancockLifetoreinsure100percentofthegrouppayoutannuitybusiness.Thetransactionresultedinanincrease topolicyholderliabilitiesofJackson£4.1billionattheinceptionofthecontract. Averageshavebeenbasedonopeningandclosingbalancesandadjustedforacquisitions,disposalsandcorporatetransactionsarisingintheyearandexcludeunallocatedsurplus ofwith-profitsfunds. (ii) (iii) (iv) (v) Theitemsaboverepresenttheamountattributabletochangesinpolicyholderliabilitiesandunallocatedsurplusofwith-profitsfunds asaresultofeachofthecomponentslisted.Thepolicyholderliabilitiesshownincludeinvestmentcontractswithoutdiscretionary participationfeatures(asdefinedinIFRS4)andtheirfullmovementintheyearbutexcludeliabilitiesthathavenotbeenallocatedto areportingsegment.Theitemsaboveareshowngrossofexternalreinsurance. Theanalysisincludestheimpactofpremiums,claimsandinvestmentmovementsonpolicyholders’liabilities.Theimpactdoesnot representpremiums,claimsandinvestmentmovementsasreportedintheincomestatement.Forexample,thepremiumsshownabove willexcludeanydeductionsforfees/charges.Claims(surrenders,maturitiesanddeaths)representthepolicyholderliabilitiesprovision releasedratherthantheclaimamountpaidtothepolicyholder. (ii) Analysis of movements in policyholder liabilities for shareholder-backed business At1January2017 Premiums Surrenders Maturities/deaths Netflows note (i) Investment-relateditemsandothermovements Foreignexchangetranslationdifferences At 31 December 2017/1 January 2018 Comprising: – Policyholder liabilities on the consolidated statement of financial position (excludes £32 million classified as unallocated to a segment) – Group's share of policyholder liabilities relating to joint ventures and associate ReclassificationofreinsuredUKannuitycontractsasheldforsale note (ii) Premiums Surrenders Maturities/deaths Netflows note (i) AdditionforclosedblockofgrouppayoutannuitiesintheUS note (iii) Investment-relateditemsandothermovements Foreignexchangetranslationdifferences At 31 December 2018 Comprising: Asia  £m 32,851 6,064 (2,755) (1,008) 2,301 3,797 (1,547) US £m 177,626 15,219 (10,017) (2,065) 3,137 16,251 (16,290) UK and Europe £m 56,158 2,283 (2,433) (2,571) (2,721) 2,930 – Total £m 266,635 23,566 (15,205) (5,644) 2,717 22,978 (17,837) 37,402 180,724 56,367 274,493 29,935 180,724 56,367 267,026 7,467 – 6,752 (2,455) (1,046) 3,251 – (1,204) 1,148 – – 7,467 – 13,940 (12,141) (2,012) (213) 4,143 (9,999) 10,945 (10,858) 1,486 (2,016) (2,244) (2,774) – (1,975) – (10,858) 22,178 (16,612) (5,302) 264 4,143 (13,178) 12,093 40,597 185,600 40,760 266,957 – Policyholder liabilities on the consolidated statement of financial position (excludes £39 million classified as unallocated to a segment) – Group's share of policyholder liabilities relating to joint ventures 32,452 185,600 40,760 258,812 and associate 8,145 – – 8,145 Notes (i) (ii) (iii) IncludingnetflowsoftheGroup’sinsurancejointventuresandassociate. ThereclassificationasheldforsaleofthereinsuredUKannuitybusinessthatwillbetransferredtoRothesaylifeoncethePartVIIprocessiscompletereflectsthosepolicyholder liabilitiesheldat1January2018. InOctober2018,JacksonenteredintoanagreementwithJohnHancockLifetoreinsure100percentofthegrouppayoutannuitybusiness.Thetransactionresultedinanincrease topolicyholderliabilitiesofJackson£4.1billionattheinceptionofthecontract. 242 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continued(iii) Movement in insurance contract liabilities and unallocated surplus of with-profits funds FurtheranalysisofthemovementintheyearoftheGroup’sinsurancecontractliabilities,grossandreinsuranceshare,investment contractsandunallocatedsurplusofwith-profitsfunds(excludingthoseheldbyjointventuresandassociate)isprovidedbelow: At1January2017 Incomeandexpenseincludedintheincomestatement Othermovementsincludingamountsincludedinothercomprehensive income note (i) Foreignexchangetranslationdifferences At 31 December 2017/1 January 2018 Incomeandexpenseincludedintheincomestatement Othermovementsincludingamountsincludedinothercomprehensive income note (ii) Foreignexchangetranslationdifferences At 31 December 2018 Insurance contract liabilities Gross £m Reinsurers’ share note(ii) £m Investment contracts note(iii) £m (316,436) (31,106) 10,051 365 (72,560) (11,179) Unallocated surplus of with-profits funds £m (14,317) (2,871) (78) 315 (35) 19,405 (328,172) 8,994 – (743) 374 294 9,673 11,440 (83,071) (4,009) (16,951) 1,289 10,502 (13,990) (10,502) 533 643 (198) (38) (145) (322,666) 11,144 (86,635) (15,845) Notes (i) (ii) (iii) Othermovementsincludepremiumsreceivedandclaimspaidoninvestmentcontractswithoutdiscretionaryparticipatingfeatures,whicharetakendirectlytothestatement offinancialpositioninaccordancewithIAS39,changesintheunallocatedsurplusofwith-profitsfundsresultingfromactuarialgainsandlossesontheGroup’sdefinedbenefit pensionschemes,whicharerecogniseddirectlyinothercomprehensiveincomeandbalancesheetreallocationswhichtotalled£10,502millionin2018(2017:£(35)million). The2018amountrepresentsthereclassificationofthereinsuredUKannuitybusinessasheldforsalevalueasat31December2018. Includesreinsurers’shareofclaimsoutstandingof£1,005million(2017:£953million). Thiscomprisesinvestmentcontractswithdiscretionaryparticipationfeaturesof£67,413million(2017:£62,677million)andinvestmentcontractswithoutdiscretionary participationfeaturesof£19,222million(2017:£20,394million). Thetotalchargeforbenefitandclaimsshownintheincomestatementcomprisestheamountsshownas‘incomeandexpenseincluded intheincomestatement’inthetableabovetogetherwithclaimspaidof£32,396millionintheperiod(2017:£29,497million)netof amountsattributabletoreinsurersof£2,114million(2017:£1,828million).In2017,theincomestatementchargealsoincludedthechange inreservesfortheheldforsaleKoreabusinessof£72million. (iv) Reinsurers’ share of insurance contract liabilities Insurancecontractliabilities Claimsoutstanding Total Asia 2,675 102 2,777 US 5,910 752 6,662 31 Dec 2018 £m UK and Europe Unallocated to a segment 1,554 149 1,703 – 2 2 Total 10,139 1,005 11,144 31 Dec 2017 £m Total 8,720 953 9,673 TheGroupcedescertainbusinesstootherinsurancecompanies.AlthoughthecedingofinsurancedoesnotrelievetheGroupfrom itsliabilitytoitspolicyholders,theGroupparticipatesinsuchagreementsforthepurposeofmanagingitslossexposure.TheGroup evaluatesthefinancialconditionofitsreinsurersandmonitorsconcentrationofcreditriskfromsimilargeographicregions,activities oreconomiccharacteristicsofthereinsurerstominimiseitsexposurefromreinsurerinsolvencies.Ofthereinsurers’shareofinsurance contractliabilitiesbalanceof£11,144millionat31December2018(31December2017:£9,673million),86percent(31December2017: 97percent)ofthebalancewerefromreinsurerswithStandard&Poor’sratingA-andabove. Thereinsurers’shareofinsurancecontractliabilitiesforAsiaprimarilyrelatestoprotectionbusinesswritteninHongKong. ThereinsuranceassetforJacksonasshowninthetableaboveprimarilyrelatestocertainfullycollateralisedformerREALICbusiness retainedbySwissRethrough100percentreinsuranceagreements.ApartfromthereinsuranceofREALICbusiness,theprincipal reinsurancecededbyJacksonoutsidetheGroupisonterm-lifeinsurance,directandassumedaccidentandhealthbusinessandGMIB variableannuityguarantees.Netcommissionsreceivedoncededbusinessandclaimsincurredcededtoexternalreinsurerstotalled £7millionand£489millionrespectivelyduring2018(2017:£28millionand£526millionrespectively).Therewerenodeferredgains orlossesonreinsurancecontractsineither2018or2017. FurtherinformationonthereinsuranceagreementwithRothesayLifeenteredintobytheGroup’sUKandEuropeinsurancebusiness in2018andlongevityreinsurancetransactionsoncertainaspectsoftheUK’sannuitybusinessin2017isprovidedinnotesD1.1and B3(iii).Thegainsandlossesrecognisedinprofitorlossfortheotherreinsurancecontractswrittenintheyearwereimmaterial. www.prudential.co.uk AnnualReport2018 Prudential plc 243 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC4 Policyholder liabilities and unallocated surplus continued C4.1 Movement and duration of liabilities continued C4.1(b) Asia insurance operations (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds Areconciliationofthetotalpolicyholderliabilitiesandunallocatedsurplusofwith-profitsfundsofAsiainsuranceoperationsfromthe beginningoftheyeartotheendoftheyearisasfollows: At1January2017 Comprising: – Policyholder liabilities on the consolidated statement of financial position – Unallocated surplus of with-profits funds on the consolidated statement of financial position – Group's share of policyholder liabilities relating to joint ventures and associate note (i) Premiums Newbusiness In-force Surrenders note (ii) Maturities/deaths Netflows note (iii) Shareholders'transferspost-tax Investment-relateditemsandothermovements Foreignexchangetranslationdifferences note (v) At 31 December 2017/1 January 2018 Comprising: With-profits business £m note(vi) Unit-linked liabilities £m Other business £m Total £m 29,933 17,507 15,344 62,784 27,266 14,289 12,161 53,716 2,667 – 1,143 4,656 5,799 (324) (901) 4,574 (54) 4,385 (2,401) – 3,218 1,298 1,637 2,935 (2,288) (150) 497 – 2,830 (807) – 3,183 999 2,130 3,129 (467) (858) 1,804 – 967 (740) 2,667 6,401 3,440 8,423 11,863 (3,079) (1,909) 6,875 (54) 8,182 (3,948) 36,437 20,027 17,375 73,839 – Policyholder liabilities on the consolidated statement of financial position – Unallocated surplus of with-profits funds on the consolidated statement 32,963 16,263 13,672 62,898 of financial position 3,474 – – 3,474 – Group's share of policyholder liabilities relating to joint ventures and associate note (i) Premiums Newbusiness In-force Surrenders note (ii) Maturities/deaths Netflows note (iii) Shareholders'transferspost-tax Investment-relateditemsandothermovements note (iv) Foreignexchangetranslationdifferences note (v) At 31 December 2018 Comprising: – 3,764 3,703 7,467 1,155 5,280 6,435 (338) (932) 5,165 (65) (1,580) 2,209 1,426 1,767 3,193 (1,904) (140) 1,149 – (1,425) 431 1,085 2,474 3,559 (551) (906) 2,102 – 221 717 3,666 9,521 13,187 (2,793) (1,978) 8,416 (65) (2,784) 3,357 42,166 20,182 20,415 82,763 – Policyholder liabilities on the consolidated statement of financial position – Unallocated surplus of with-profits funds on the consolidated statement 39,655 16,368 16,084 72,107 of financial position 2,511 – – 2,511 – Group's share of policyholder liabilities relating to joint ventures and associate note (i) Averagepolicyholderliabilitybalances note (vii) 2018 2017 – 3,814 4,331 8,145 36,309 30,115 20,105 18,767 18,895 16,359 75,309 65,241 244 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedNotes (i) TheGroup’sinvestmentinjointventuresareaccountedforonanequitymethodandtheGroup’sshareofthepolicyholderliabilitiesasshownaboverelatetothelifebusiness inChina,IndiaandoftheTakafulbusinessinMalaysia. Therateofsurrendersforshareholder-backedbusiness(expressedasapercentageofopeningliabilities)was6.6percentin2018(2017:8.4percent). (ii) (iii) Netflowshaveincreasedby£1,541millionto£8,416millionin2018predominantlyreflectingcontinuedgrowthofthein-forcebook. (iv) Investment-relateditemsandothermovementsfor2018primarilyrepresentunrealisedinvestmentslossesfollowingunfavourableequitymarketsintheyearandrising interestrates. (v) Movementsintheyearhavebeentranslatedattheaverageexchangeratesfortheyear.Theclosingbalancehasbeentranslatedattheclosingspotratesasattheendoftheyear. (vi) Differencesuponretranslationareincludedinforeignexchangetranslationdifferences. Thepolicyholderliabilitiesofthewith-profitsbusinessof£39,655million,showninthetableabove,isafterdeductingtheintra-groupreinsuranceliabilitiescededbytheUKand Europeinsuranceoperationsof£1,109milliontotheHongKongwith-profitsbusiness(31December2017:£1,235million).IncludingthisamounttheAsiawith-profitspolicyholder liabilitiesare£40,764million(31December2017:£34,198million). (vii) Averageshavebeenbasedonopeningandclosingbalancesandexcludeunallocatedsurplusofwith-profitsfunds. (ii) Duration of liabilities Thetablebelowshowsthecarryingvalueofpolicyholderliabilitiesandthematurityprofileofthecashflowsonadiscountedbasis, takingaccountofexpectedfuturepremiumsandinvestmentreturns: Policyholderliabilities Expectedmaturity: 0to5years 5to10years 10to15years 15to20years 20to25years Over25years 31 Dec 2018 £m 72,107 31 Dec 2018 % 31 Dec 2017 £m 62,898 31 Dec 2017 % 20 19 15 12 10 24 21 19 16 12 10 22 (iii) Summary policyholder liabilities (net of reinsurance) and unallocated surplus At31December2018,thepolicyholderliabilitiesandunallocatedsurplusforAsiaoperationsexcludingjointventuresandafter deductingintra-groupreinsuranceliabilitiescededbyUKandEuropeof£74,618million(2017:£66,372million),netofexternal reinsuranceof£2,777million(2017:£1,960million),comprisedthefollowing: HongKong Indonesia Malaysia Singapore Taiwan Otheroperations TotalAsiaoperations 2018 £m 2017 £m 34,545 3,680 5,447 18,154 4,203 5,812 71,841 29,411 3,762 5,014 17,432 3,729 5,064 64,412 www.prudential.co.uk AnnualReport2018 Prudential plc 245 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC4 Policyholder liabilities and unallocated surplus continued C4.1 Movement and duration of liabilities continued C4.1(c) US insurance operations (i) Analysis of movements in policyholder liabilities AreconciliationofthetotalpolicyholderliabilitiesofUSinsuranceoperationsfromthebeginningoftheyeartotheendoftheyear isasfollows: US insurance operations At1January2017 Premiums Surrenders Maturities/deaths Netflows note (ii) Transfersfromgeneraltoseparateaccount Investment-relateditemsandothermovements Foreignexchangetranslationdifferences note (i) At 31 December 2017/1 January 2018 Premiums Surrenders Maturities/deaths Netflows note (ii) AdditionforclosedblockofgrouppayoutannuitiesintheUS note (iii) Transfersfromgeneraltoseparateaccount Investment-relateditemsandothermovements note (iv) Foreignexchangetranslationdifferences note (i) At 31 December 2018 Averagepolicyholderliabilitybalances note (v) 2018 2017 Variable annuity separate account liabilities £m Fixed annuity, GICs and other business £m Total £m 120,411 57,215 177,626 11,529 (6,997) (1,026) 3,506 2,096 15,956 (11,441) 3,690 (3,020) (1,039) (369) (2,096) 295 (4,849) 15,219 (10,017) (2,065) 3,137 – 16,251 (16,290) 130,528 50,196 180,724 10,969 (8,797) (1,085) 1,087 – 530 (11,561) 7,636 2,971 (3,344) (927) (1,300) 4,143 (530) 1,562 3,309 13,940 (12,141) (2,012) (213) 4,143 – (9,999) 10,945 128,220 57,380 185,600 129,374 125,469 52,752 182,126 53,706 179,175 Notes (i) MovementsintheyearhavebeentranslatedatanaveragerateofUS$1.34:£1.00(2017:US$1.29:£1.00).TheclosingbalanceshavebeentranslatedatclosingrateofUS$1.27: £1.00(2017:US$1.35:£1.00).Differencesuponretranslationareincludedinforeignexchangetranslationdifferences. (ii) Netoutflowswere£213million(2017:inflows£3,137million),withpositiveinflowstovariableannuitiesbusinessasnewbusinessexceedswithdrawalsandsurrendersoffsetby (iii) outflowsfromfixedannuity,GICsandotherbusinessastheportfoliomatures. InOctober2018,JacksonenteredintoanagreementwithJohnHancockLifetoreinsure100percentofthegrouppayoutannuitybusiness.Thetransactionresultedinanincrease topolicyholderliabilitiesofJackson£4.1billionattheinceptionofthecontract. (iv) Negativeinvestment-relateditemsandothermovementsinvariableannuityseparateaccountliabilitiesof£(11,561)millionfor2018primarilyreflectsthedecreaseinequityand bondvaluesduringtheyear.Fixedannuity,GICandotherbusinessinvestmentandothermovementsof£1,562millionprimarilyreflecttheinterestcreditedtothepolicyholder accountsandincreaseintheguaranteereservesintheyear. Averageshavebeenbasedonopeningandclosingbalancesandadjustedforacquisitions,disposalsandcorporatetransactionsarisingintheyear. (v) 246 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continued(ii) Duration of liabilities Thetablebelowshowsthecarryingvalueofpolicyholderliabilitiesandmaturityprofileofthecashflowsonadiscountedbasisfor2018 and2017: 31 Dec 2018 31 Dec 2017 Fixed annuity and other business (including GICs and similar contracts) £m Variable annuity separate account liabilities £m Fixed annuity and other business (including GICs and similar contracts) £m Total £m Variable annuity separate account liabilities £m Total £m Policyholderliabilities 57,380 128,220 185,600 50,196 130,528 180,724 Expectedmaturity: 0to5years 5to10years 10to15years 15to20years 20to25years Over25years % 51 24 12 7 3 3 % % 40 28 16 9 4 3 43 27 15 8 4 3 % 50 25 12 7 3 3 % % 42 29 15 8 4 2 44 28 14 8 4 2 (iii) Aggregate account values Thetablebelowshowsthedistributionofaccountvaluesforfixedannuities(fixedinterestrateandfixedindex),thefixedaccountportion ofvariableannuities,andinterest-sensitivelifebusinesswithintherangeofminimumguaranteedinterestratesasdescribedinnoteC4.2(b). Minimum guaranteed interest rate 31 Dec 2018 31 Dec 2017 31 Dec 2018 31 Dec 2017 Fixed annuities and the fixed account portion of variable annuities £m Interest-sensitive life business £m >0%–1.0% >1.0%–2.0% >2.0%–3.0% >3.0%–4.0% >4.0%–5.0% >5.0%–6.0% Total 7,584 6,789 10,075 1,274 1,794 225 27,741 6,887 7,385 9,799 1,272 1,744 220 27,307 – – 229 2,394 2,106 1,703 6,432 – – 221 2,341 2,059 1,651 6,272 www.prudential.co.uk AnnualReport2018 Prudential plc 247 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC4 Policyholder liabilities and unallocated surplus continued C4.1 Movement and duration of liabilities continued C4.1(d) UK and Europe insurance operations (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds Areconciliationofthetotalpolicyholderliabilitiesandunallocatedsurplusofwith-profitsfundsofUKandEuropeinsuranceoperations fromthebeginningoftheyeartotheendoftheyearisasfollows: At1January2017 Comprising: – Policyholder liabilities on the consolidated statement of financial position – Unallocated surplus of with-profits funds on the consolidated statement of financial position Premiums Surrenders Maturities/deaths Netflows note (i) Shareholders'transferspost-tax Switches Investment-relateditemsandothermovements Foreignexchangetranslationdifferences At 31 December 2017/1 January 2018 Comprising: – Policyholder liabilities on the consolidated statement of financial position – Unallocated surplus of with-profits funds on the consolidated statement of financial position ReclassificationofreinsuredUKannuitycontractsasheldforsale note (ii) Premiums Surrenders Maturities/deaths Netflows note (i) Shareholders'transferspost-tax Switches Investment-relateditemsandothermovements note (iii) Foreignexchangetranslationdifferences At 31 December 2018 Comprising: – Policyholder liabilities on the consolidated statement of financial position – Unallocated surplus of with-profits funds on the consolidated statement of financial position Averagepolicyholderliabilitybalances note (iv) 2018 2017 Shareholder-backed funds and subsidiaries With-profits sub-funds £m note(v) Unit-linked liabilities £m Annuity and other long-term business £m Total £m 113,146 22,119 34,039 169,304 101,496 22,119 34,039 157,654 11,650 12,527 (4,506) (4,564) 3,457 (233) (192) 8,408 113 – 1,923 (2,342) (612) (1,031) – 192 1,865 – – 360 (91) (1,959) (1,690) – – 873 – 11,650 14,810 (6,939) (7,135) 736 (233) – 11,146 113 124,699 23,145 33,222 181,066 111,222 23,145 33,222 167,589 13,477 – 12,525 (4,764) (4,552) 3,209 (259) (165) (3,341) (14) – – – (10,858) 13,477 (10,858) 1,147 (1,950) (619) (1,422) – 165 (1,171) – 339 (66) (1,625) (1,352) – – (969) – 14,011 (6,780) (6,796) 435 (259) – (5,481) (14) 124,129 20,717 20,043 164,889 110,795 20,717 20,043 151,555 13,334 – – 13,334 111,009 106,359 21,931 22,632 29,347 33,631 162,287 162,622 Notes (i) (ii) (iii) Netinflowswere£435million(31December2017:netinflowsof£736million).Inflowsintothewith-profitsbusinesswereoffsetbyoutflowsfromboththeannuitybusiness,asthe closedbookmatures,andtheunit-linkedbusiness.Thelevelsofinflows/outflowsfortheunit-linkedbusinessisdrivenbycorporatepensionschemeswithtransfersinoroutfrom onlyasmallnumberofschemesinfluencingthelevelofflowsintheyear. ThereclassificationasheldforsaleofthereinsuredUKannuitybusinessthatwillbetransferredtoRothesaylifeoncethePartVIIprocessiscompletereflectsthevaluepolicyholder liabilitiesheldat1January2018. Investment-relateditemsandothermovementsforwith-profitsbusinessprincipallycompriseinvestmentreturnattributabletopolicyholdersreflectingfallingequitymarketsinthe laterquarteroftheyear.Forshareholder-backedannuityandotherlong-termbusiness,investment-relateditemsandothermovementsincludetheeffectofmovementsininterest ratesandcreditspreads. (iv) Averageshavebeenbasedonopeningandclosingbalancesandadjustedforacquisitions,disposalsandcorporatetransactionsarisingintheyearandexcludeunallocatedsurplus ofwith-profitsfunds. IncludestheScottishAmicableInsuranceFund. (v) 248 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continued(ii) Duration of liabilities Withtheexceptionofmostunitisedwith-profitsbondsandotherwholeoflifecontracts,themajorityofthecontractsofUKandEurope insuranceoperationshaveacontractterm.Ineffect,thematuritytermoftheothercontractsreflectstheearlierofdeath,maturity,orthe policylapsing.Inaddition,asdescribedinnoteA3.1,with-profitscontractliabilitiesincludeprojectedfuturebonusesbasedoncurrent investmentvalues.TheactualamountspayablewillvarywithfutureinvestmentperformanceofSAIFandtheWPSF. Thefollowingtablesshowthecarryingvalueofthepolicyholderliabilitiesandthematurityprofileofthecashflows,ona discountedbasis: With-profits business 31 Dec 2018 £m Annuity business (insurance contracts) Other Total Insurance contracts Invest- ment contracts Total Non- profit annuities within WPSF Shareholder -backed annuity Total Insurance contracts Invest- ment contracts Total Policyholderliabilities 34,242 67,020 101,262 9,533 19,119 28,652 6,063 15,578 21,641 151,555 Expectedmaturity: 0to5years 5to10years 10to15years 15to20years 20to25years over25years 34 23 16 11 7 9 37 27 17 9 4 6 36 26 17 10 5 6 33 26 17 11 6 7 31 Dec 2018 % 27 23 19 14 9 8 29 24 18 13 8 8 31 Dec 2017 £m 44 25 15 8 4 4 32 24 18 12 7 7 36 24 17 11 6 6 35 25 17 10 6 7 Policyholderliabilities 38,285 62,328 100,613 10,609 32,572 43,181 6,714 17,081 23,795 167,589 Expectedmaturity: 0to5years 5to10years 10to15years 15to20years 20to25years over25years 33 23 16 11 7 10 37 27 17 10 4 5 36 25 17 10 5 7 31 24 17 11 7 10 31 Dec 2017 % 26 23 18 13 9 11 27 23 18 13 9 10 41 26 15 9 5 4 31 22 18 13 8 8 34 23 17 12 7 7 34 25 17 11 6 7 — Thecashflowprojectionsofexpectedbenefitpaymentsusedinthematurityprofiletableabovearefromvalueofin-forcebusiness andexcludethevalueoffuturenewbusiness,includingfuturevestingofinternalpensioncontracts. — Benefitpaymentsdonotreflectthepatternofbonusesandshareholdertransfersinrespectofthewith-profitsbusiness. — Shareholder-backedannuitybusinessincludestheex-PRILandthelegacyPACshareholderannuitybusinessbutexcludesthe amountclassifiedasheldforsale. — Investmentcontractsunder‘Other’comprisecertainunit-linkedandsimilarcontractsaccountedforunderIAS39andIFRS15. — Forbusinesswithnomaturitytermincludedwithinthecontracts,forexample,with-profitsinvestmentbondssuchasPrudence Bonds,anassumptionismadeastolikelydurationbasedonpriorexperience. www.prudential.co.uk AnnualReport2018 Prudential plc 249 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC4 Policyholder liabilities and unallocated surplus continued C4.1 Movement and duration of liabilities continued (iii) Annuitant mortality MortalityassumptionsforUKannuitybusinessaresetinlightofrecentpopulationandinternalexperience,withanallowancefor expectedfuturemortalityimprovements.Giventhelong-termnatureofannuitybusiness,longevityremainsasignificantassumptionin determiningpolicyholderliabilities.Theassumptionsusedreferencerecentpopulationmortalitydata,withspecificriskfactorsapplied onaperpolicybasistoreflectthefeaturesoftheCompany’sportfolio. Therecentdecliningmortalityimprovementsobservedinpopulationdatawereconsideredaspartofthejudgementexercisedin settingthe2018mortalitybasis.NewmortalityprojectionmodelsarereleasedregularlybytheContinuousMortalityInvestigation (CMI).TheCMI2016modelwasusedtoproducethe2018resultsandtheCMI2015modelwasusedtoproducethe2017results. ThedefaultcalibrationofCMI2016wasadoptedtoreflecttheCompany’sviewoffuturemortalityimprovementsbasedonarangeof possibleoutcomes,withanappropriatemarginforprudence.Themortalityimprovementassumptionsusedaresummarisedinthe tablebelow: Year ended CMI Model, with calibration to reflect future mortality improvements 31 December 2018 CMI 2016 31December2017 CMI2015 For males: with a long-term improvement rate of 2.25% pa For females: with a long-term improvement rate of 2.00% pa Formales:withalong-termimprovementrateof2.25%pa Forfemales:withalong-termimprovementrateof2.00%pa Forannuitiesindeferment,thetablesusedwereAM92–fouryears(males)andAF92–fouryears(females)for2018and2017. C4.2 Products and determining contract liabilities C4.2(a) Asia Contract type Description Material features Determination of liabilities With-profits and participating contracts Providessavingsand/orprotection wherethebasicsumassuredcanbe enhancedbyaprofitshare(or bonus)fromtheunderlyingfundas determinedatthediscretionofthe Company. Participatingproductsoftenoffera guaranteedmaturityorsurrender value.Declaredregularbonuses areguaranteedoncevested.Future bonusratesandcashdividendsare notguaranteed.Marketvalue adjustmentsandsurrender penaltiesareusedforcertain productswherethelawpermits suchadjustments.Guaranteesare predominantlysupportedby segregatedlifefundsandtheir estates. With-profitscontractsare predominantlysoldinHongKong, MalaysiaandSingapore.Thetotal valueofthewith-profitsfundsisdriven bytheunderlyingassetvaluationwith movementsreflectedprincipallyinthe accountingvalueofpolicyholder liabilitiesandunallocatedsurplus. InTaiwanandIndia,USGAAPis appliedformeasuringinsuranceassets andliabilities.TheotherAsia operationsprincipallyadoptagross premiumvaluationmethod. 250 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC4.2(a) Asia continued Contract type Description Material features Determination of liabilities Term, whole life and endowment assurance Non-participatingsavingsand/or protectionwherethebenefitsare guaranteed,ordeterminedbya setofdefinedmarket-related parameters. Theseproductsoftenoffera guaranteedmaturityandsurrender value.ItiscommoninAsiafor regulationsormarket-driven demandandcompetitionto providesomeformofcapitalvalue protectionandminimumcrediting interestrateguarantees.Thisis reflectedwithintheguaranteed maturityandsurrendervalues. Guaranteesareborneby shareholders. Unit-linked Combinessavingswithprotection, thecashvalueofthepolicydepends onthevalueoftheunderlying unitisedfunds. Theapproachtodeterminingthe contractliabilitiesisgenerallydriven bythelocalsolvencybasis.Agross premiumvaluationmethodisusedin thosecountrieswherearisk-based capitalframeworkisadoptedforlocal solvency.Underthegrosspremium valuationmethod,allcashflowsare valuedexplicitlyusingbestestimate assumptionswithasuitablemarginfor prudence. Thisisachievedeitherthroughadding anexplicitallowanceforassumptions todeviatefrombestestimateorby applyinganoverlayconstraintsothat ondayonenonegativereserves(ie wherefuturepremiuminflowsare expectedtoexceedprudentfuture claimsandoutflows)arederivedatan individualpolicyholderlevel,ora combinationofboth. InVietnam,theCompanyusesan estimationbasisalignedsubstantially tothatusedbythecountriesapplying thegrosspremiumvaluationmethod. ForIndiaandTaiwan,USGAAPis appliedformeasuringinsurance liabilities.Forthesebusinesses,the futurepolicyholderbenefitprovisions fornon-linkedbusinessaredetermined usingthenetlevelpremiummethod, withanallowanceforsurrenders, maintenanceandclaimsexpenses. Ratesofinterestusedinestablishing thepolicyholderbenefitprovisions varybyoperationdependingonthe circumstancesattachingtoeachblock ofbusiness. TheotherAsiaoperationsprincipally adoptanetpremiumvaluationmethod todeterminethefuturepolicyholder benefitprovisions. Theattachingliabilitiesreflecttheunit valueobligationdrivenbythevalueof theinvestmentsoftheunitfund. Additionaltechnicalprovisionsareheld forguaranteedbenefitsbeyondthe unitfundvalueusingagrosspremium valuationmethod.Theseadditional provisionsarerecognisedasa componentofotherbusinessliabilities. www.prudential.co.uk AnnualReport2018 Prudential plc 251 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC4 Policyholder liabilities and unallocated surplus continued C4.2 Products and determining contract liabilities continued C4.2(a) Asia continued Contract type Description Material features Determination of liabilities Health and protection Healthandprotectionfeaturesare offeredassupplementstothe productslistedaboveorsoldas standaloneproducts.Protection coversmortalityormorbidity benefitsincludinghealth,disability, criticalillnessandaccident coverage. Thedeterminationoftheliabilities ofhealthandprotectioncontracts aredrivenbythelocalsolvencybasis. Agrosspremiumvaluationmethod isusedinthosecountrieswherea risk-basedcapitalframeworkis adoptedforlocalsolvency.Underthe grosspremiumvaluationmethod,all cashflowsarevaluedexplicitlyusing bestestimateassumptionswitha suitablemarginforprudence. Thisisachievedeitherthroughadding anexplicitallowanceforassumptions todeviatefrombestestimateorby applyinganoverlayconstraintsothat ondayonenonegativereserves(ie wherefuturepremiuminflowsare expectedtoexceedprudentfuture claimsandoutflows)arederivedatan individualpolicyholderlevel,ora combinationofboth. 252 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC4.2(b) US Contract type Description Material features Determination of liabilities Guaranteedminimuminterest rate.At31December2018, Jacksonhadfixedinterestrate annuitiestotalling£12.6billion (2017:£12.6billion)inaccount valuewithminimumguaranteed ratesrangingfrom1.0percentto 5.5percentanda2.91percent averageguaranteedrate(2017: 1.0percentto5.5percent anda2.93percentaverage guaranteedrate). Fixed interest rate annuities Fixedinterestrateannuitiesare primarilydeferredannuityproducts thatareusedforassetaccumulation inretirementplanningandfor providingincomeinretirement. At31December2018,fixedinterest rateannuitiesaccountedfor 7percent(2017:7percent)ofpolicy andcontractliabilitiesofJackson. Thepolicyholderofafixedinterest rateannuitypaysJacksona premium,whichiscreditedtothe policyholder’saccount.Periodically, interestiscreditedtothe policyholder’saccountandinsome casesadministrativechargesare deductedfromthepolicyholder’s account.Jacksonmakesbenefit paymentsatafuturedateas specifiedinthepolicybasedonthe valueofthepolicyholder’saccount atthatdate. ThepolicyprovidesthatatJackson’s discretionitmayresettheinterest rate,subjecttoaguaranteed minimum. Approximately64percent(2017: 60percent)ofthefixedinterest rateannuitiesJacksonwrotein2018 providefora(positiveornegative) marketvalueadjustment(MVA) onsurrender.Thisformula-based adjustmentapproximatesthe changeinvaluethatassets supportingtheproductwould realiseasinterestratesmove. AsexplainedinnoteA3.1allofJackson’s insuranceliabilitiesarebasedon USGAAP.Anoverviewofthedeferral andamortisationofacquisitioncostsfor JacksonisprovidedinnoteC5.2(b). Withminorexceptionsthefollowingis appliedtomostofJackson’scontracts. Contractsareaccountedforasinvestment contractsasdefinedforUSGAAP purposesbyapplyingaretrospective depositmethodtodeterminetheliability forpolicyholderbenefits. Thisisthenaugmentedby: — Anyamountsthathavebeenassessed tocompensatetheinsurerforservices tobeperformedoverfutureperiods (iedeferredincome); — Anyamountspreviouslyassessed againstpolicyholdersthatare refundableonterminationofthe contract;and — Anyprobablefuturelossonthe contract(iepremiumdeficiency). Capitalisedacquisitioncostsanddeferred incomeforthesecontractsareamortised overthelifeofthebookofcontracts. Thepresentvalueoftheestimatedgross profitsiscomputedusingtherateof interestthataccruestopolicyholder balances(sometimesreferredtoasthe contractrate). Estimatedgrossprofitsincludeestimates ofthefollowing,eachofwhichwillbe determinedbasedonthebestestimate ofamountsoverthelifeofthebookof contractswithoutprovisionforadverse deviation: — Amountsexpectedtobeassessedfor mortalitylessbenefitclaimsinexcess ofrelatedpolicyholderbalances; — Amountsexpectedtobeassessedfor contractadministrationlesscosts incurredforcontractadministration; — Amountsexpectedtobeearnedfrom theinvestmentofpolicyholder balanceslessinterestcreditedto policyholderbalances; — Amountsexpectedtobeassessed againstpolicyholderbalancesupon terminationofcontracts(sometimes referredtoassurrendercharges);and — Otherexpectedassessmentsand credits. Theinterestguaranteesarenotexplicitly valuedbutarereflectedastheyareearned inthecurrentaccountliabilityvalue. www.prudential.co.uk AnnualReport2018 Prudential plc 253 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC4 Policyholder liabilities and unallocated surplus continued C4.2 Products and determining contract liabilities continued C4.2(b) US continued Contract type Description Material features Determination of liabilities Guaranteedminimumratesare generallysetat1.0to3.0percent. At31December2018,Jacksonhad fixedindexannuitiesallocatedto indexedfundstotalling£6.0billion (31December2017:£6.3billion)in accountvaluewithminimum guaranteedratesonindexaccounts rangingfrom1.0percentto 3.0percentanda1.77percent averageguaranteedrate(2017: 1.0percentto3.0percentanda 1.77percentaverageguarantee rate). Jacksonoffersanoptionallifetime incomerider,whichcanbeelected foranadditionalfee. Jacksonalsooffersfixedinterest accountsonsomefixedindex annuityproducts.At31December 2018,fixedinterestaccountsof fixedindexannuitiestotalled £2.7billion(2017:£2.5billion)in accountvalue. Minimumguaranteedratesonfixed interestaccountsrangefrom 1.0percentto3.0percentanda 2.57percentaverageguaranteed rate(2017:1.0percentto 3.0percentanda2.58percent averageguaranteedrate). Thecontractsprovideannuity paymentsthatmeetthe requirementsofthespecific pensionplanbeingcovered.In somecases,thecontractshavepre- retirementdeathand/or withdrawalbenefits,pre- retirementsurvivingspouse benefits,and/orsubsidisedearly retirementbenefits. Theliabilityforpolicyholderbenefits thatrepresenttheguaranteed minimumreturnisdeterminedsimilarly totheliabilitiesofthefixedinterest annuityabove.Theequity-linked returnoptionwithinthecontractis treatedasanembeddedliabilityunder USGAAPandthereforethiselementof theliabilityisrecognisedatfairvalue. Theliabilityforthelifetimeincome riderisdeterminedeachperiodend byestimatingtheexpectedvalueof benefitsinexcessoftheprojected accountbalanceandrecognisingthe excessonaproratedbasisoverthelife ofthecontractbasedontotalexpected assessments. Theliabilityforfuturebenefitsis determinedunderUSGAAP methodologyforlimited-payment contracts,usingassumptionsasofthe acquisitiondateastomortalityand expenseplusprovisionsforadverse deviation. Fixed index annuities Fixedindexannuitiesvaryin structurebutaregenerallydeferred annuitiesthatenablepolicyholders toobtainaportionofanequity- linkedreturn(basedonparticipation ratesandcaps),andprovidea guaranteedminimumreturn.Fixed indexannuitiesaccountedfor 5percent(2017:5percent)of Jackson’spolicyandcontract liabilitiesat31December2018. Jacksonhedgestheequityreturn riskonfixedindexproductsusing offsettingequityexposureinthe variableannuityproduct.Thecost ofhedgingistakenintoaccountin settingtheindexparticipationrates orcaps. Group pay-out annuities Grouppayoutannuitiesconsistof ablockofdefinedbenefitannuity plansassumedfromJohnHancock USA.Asinglepremiumpayment fromanemployer(contractholder) fundsthepensionbenefitsforits employees(participants).The contractsaretailoredtomeetthe requirementsofthespecificpension planbeingcovered.Thisisaclosed blockofbusinessfromtwo standpoints:(1)JohnHancockUSA isnolongersellingnewcontracts and(2)contractholders (companies)arenolongeradding additionalparticipantstothese definedbenefitpensionplans.The majorityofparticipantsareinthe payoutphase,buttherearesome participantsinthedeferralphase. 254 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC4.2(b) US continued Contract type Description Material features Determination of liabilities Thegeneralprinciplesforfixedannuity andfixedindexannuityalsoapplyto variableannuities. Theimpactofanyfixedaccount interestguaranteesisreflectedasthey areearnedinthecurrentaccount value. Jacksonregularlyevaluatesestimates usedandadjuststhebenefitguarantee liabilitybalances,witharelatedcharge orcredittobenefitexpenseifactual experienceorotherevidencesuggests thatearlierassumptionsshouldbe revised. Variable annuities Variableannuitiesaredeferred annuitiesthathavethesametax advantagesandpayoutoptionsas fixedinterestrateandfixedindex annuities.Theyarealsousedfor assetaccumulationinretirement planningandtoprovideincomein retirement.At31December2018, variableannuitiesaccountedfor 75percent(2017:77percent)of Jackson’spolicyandcontract liabilities. Therateofreturndependsuponthe performanceoftheselectedfund portfolio.Policyholdersmayallocate theirinvestmenttoeitherthefixed accountoraselectionofvariable accounts.Subjecttobenefit guarantees,investmentriskonthe variableaccountisbornebythe policyholder,whileinvestmentrisk onthefixedaccountisborneby Jacksonthroughguaranteed minimumfixedratesofreturn.At 31December2018,5percent (2017:5percent)ofvariableannuity fundswereinfixedaccounts. Jacksonhadvariableannuityfunds infixedaccountstotalling £6.4billion(2017:£5.9billion)with minimumguaranteedratesranging from1.0percentto3.0percent anda1.70percentaverage guaranteedrate(2017:1.0percent to3.0percentanda1.68percent averageguaranteedrate). Jacksonoffersachoiceof guaranteedbenefitoptionswithin itsvariableannuityproduct portfolio,whichcanbeelectedfor additionalfees.Theseguaranteed benefitsmightbeexpressedasthe returnofeither:(a)totaldeposits madetothecontractadjustedfor anypartialwithdrawals,(b)total depositsmadetothecontract adjustedforanypartial withdrawals,plusaminimum return,or(c)thehighestcontract valueonaspecifiedanniversary dateadjustedforanywithdrawals followingthatcontractanniversary. Jacksonhedgestheserisksusing derivativeinstrumentsasdescribed innoteC7.3 www.prudential.co.uk AnnualReport2018 Prudential plc 255 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC4 Policyholder liabilities and unallocated surplus continued C4.2 Products and determining contract liabilities continued C4.2(b) US continued Contract type Description Material features Determination of liabilities Variable annuities continued Thebenefitguaranteetypesare setoutbelow: Benefitsthatarepayableinthe eventofdeath(guaranteed minimumdeathbenefit). Benefitsthatarepayableuponthe depletionoffunds(guaranteed minimumwithdrawalbenefit). TheliabilityforGuaranteedMinimum DeathBenefit(GMDB)isdetermined eachperiodendbyestimatingthe expectedvalueofbenefitsinexcess oftheprojectedaccountbalanceand recognisingtheexcessrateablyover thelifeofthecontractbasedontotal expectedassessments.At 31December2018,theseliabilities werevaluedusingaseriesofstochastic investmentperformancescenarios,a meaninvestmentreturnof7.4percent (2017:7.4percent)netofexternalfund managementfees,andassumptionsfor policyholderbehaviour,mortalityand expensethataresimilartothoseused inamortisingthecapitalisedacquisition costs. TheliabilityfortheGuaranteed MinimumWithdrawalBenefit (GMWB)‘forlife’portionisdetermined similarlytoGMDBabove. Provisionsforbenefitsunder GuaranteedMinimumWithdrawal Benefit‘notforlife’featuresare recognisedatfairvalueunder USGAAP. Non-performanceriskisincorporated intothefairvaluecalculationthrough theuseofdiscountinterestrates sourcedfromanAAcorporatecredit curveasaproxyforJackson’sown creditrisk.Otherriskmargins, particularlyforpolicyholderbehaviour andlong-termvolatility,arealso incorporatedintothemodelthrough theuseofexplicitlyconservative assumptions.Onaperiodicbasis, Jacksonvalidatestheresultingfair valuesbasedoncomparisonstoother modelsandmarketmovements. 256 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC4.2(b) US continued Contract type Description Material features Determination of liabilities Variable annuities continued Life insurance Benefitsthatarepayableat annuitisation(guaranteedminimum incomebenefit). Thisfeatureisnolongerofferedand existingcoverageissubstantially reinsured,subjecttodeductibles andannualclaimlimits. Benefitsthatarepayableattheend ofaspecifiedperiod(guaranteed minimumaccumulationbenefit). Thisfeatureisnolongeroffered. Excludingthebusinessthatis subjecttotheretrocessiontreaties at31December2018,Jacksonhad interest-sensitivelifebusinessin forcewithtotalaccountvalueof £6.4billion(2017:£6.3billion), withminimumguaranteedinterest ratesrangingfrom2.5percentto 6.0percentwitha4.67percent averageguaranteedrate(2017: 2.5percentto6.0percent witha4.67percentaverage guaranteedrate). Lifeproductsincludetermlife, traditionallifeandinterest-sensitive life(universallifeandvariable universallife).Lifeinsurance productsaccountedfor9percent (2017:9percent)ofJackson’s policyandcontractliabilitiesat 31December2018.Jackson discontinuednewsalesoflife insuranceproductsin2012. Termlifeprovidesprotectionfora definedperiodandabenefitthatis payabletoadesignatedbeneficiary upondeathoftheinsured. Traditionallifeprovidesprotection foreitheradefinedperiodoruntil astatedageandincludesa predeterminedcashvalue. ThedirectGuaranteedMinimum IncomeBenefit(GMIB)liabilityis determinedbyestimatingthe expectedvalueoftheannuitisation benefitsinexcessoftheprojected accountbalanceatthedateof annuitisationandrecognisingthe excessrateablyoverthelifeofthe contractbasedontotalexpected assessments. GuaranteedMinimumIncomeBenefits arereinsured,subjecttoadeductible andannualclaimlimits.Duetothe netsettlementprovisionsofthe reinsuranceagreement,underthe ‘grandfathered’USGAAP,itis recognisedatfairvaluewiththe changeinfairvalueincludedasa componentofshort-termfluctuations. Volatilityandnon-performancerisk isconsideredasperGMWBabove. ProvisionsforGuaranteedMinimum AccumulationBenefit(GMAB) arerecognisedatfairvalueunder USGAAP.Volatilityandnon- performanceriskisconsideredasper GMWBabove. Fortermandtraditionallifeinsurance contracts,provisionsforfuturepolicy benefitsaredeterminedunder USGAAPusingthenetlevelpremium methodandassumptionsasofthe issuedateastomortality,interest, policylapsesandexpensesplus provisionsforadversedeviationfor directlysoldbusinessandassumptions atpurchaseforacquiredbusiness. Foruniversallifeandvariableuniversal lifearetrospectivedepositmethod isusedtodeterminetheliabilityfor policyholderbenefits.Thisisthen augmentedbyadditionalliabilities toaccountforno-lapseguarantees, profitsfollowedbylosses,contract featuressuchaspersistencybonuses, andcostofinterestrateguarantees. www.prudential.co.uk AnnualReport2018 Prudential plc 257 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC4 Policyholder liabilities and unallocated surplus continued C4.2 Products and determining contract liabilities continued C4.2(b) US continued Contract type Description Material features Determination of liabilities Life insurance continued Institutional products Universallifeprovidespermanent individuallifeinsuranceforthelife oftheinsuredandincludesa savingselement. Variableuniversallifeisatypeoflife insurancepolicythatcombines deathbenefitprotectionwiththe abilityforthepolicyholderaccount tobeinvestedinseparateaccount funds.Forcertainfixeduniversallife plans,additionalprovisionsareheld toreflecttheexistenceof guaranteesofferedinthepastthat arenolongersupportedbyearnings ontheexistingassetportfolio,orfor situationswherefuturemortality chargesarenotexpectedtobe sufficienttoprovideforfuture mortalitycosts. Institutionalproductsare: guaranteedinvestmentcontracts (GICs),fundingagreements (includingagreementsissuedin conjunctionwithJackson’s participationintheUSFederal HomeLoanBankprogramme)and MediumTermNotefunding agreements.At31December2018, institutionalproductsaccountedfor 1percentofcontractliabilities (31December2017:1percent). Institutionalproductsareclassified asinvestmentcontracts,andare accountedforasfinancialliabilities. Thecurrencyriskoncontractsthat representcurrencyobligationsother thanUSdollarsarehedgedusing cross-currencyswaps. GICsfeaturealumpsum policyholderdepositonwhich interestispaidataratefixedat inception.Marketvalue adjustmentsaremadetothevalue ofanyearlywithdrawals. Fundingagreementsfeatureeither lumpsumorperiodicpolicyholder deposits.Interestispaidatafixed orindexlinkedrate.Funding agreementshaveadurationof betweenoneand30years.In2018 and2017therewerenofunding agreementsterminablebythe policyholderwithlessthan90days’ notice. 258 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC4.2(c) UK and Europe Contract type Description PruFund contracts Arangeofwith-profitscontracts offerpolicyholdersachoiceof investmentprofiles. Unliketraditionalwith-profits contracts,noregularbonusesare declared.Totalpolicyholderreturn isdeterminedbyanExpected GrowthRate(EGR).AdifferentEGR isappliedforeachofthedifferent PruFundfundswithintherange, eachrelatingtotheindividualasset mixofthatfund.Theapplicable EGR,netoftherelevantcharges, isappliedtocalculatethesmoothed unitvalueofpolicyholderfunds. Innormalinvestmentconditionsthe EGRisexpectedtoreflectPAC’s viewofhowthefundswillperform overthelongerterm.Anadjustment ismadetothesmoothedunitvalueif itmovesoutsideofaspecifiedrange relativetothevalueofthe underlyingassets. With-profitscontractsprovide returnstopolicyholdersthrough bonusesthatare‘smoothed’.There aretwotypesofbonuses:‘regular’ and‘final’. Regularbonusratesaredetermined foreachtypeofpolicyprimarilyby targetingthebonuslevelata prudentproportionofthelong-term expectedfutureinvestmentreturn onunderlyingassets,reducedas appropriateforeachtypeofpolicy toallowforitemssuchasexpenses, charges,taxandshareholders’ transfers. With-profits contracts in WPSF Material features Determination of liabilities TheEGRsarereviewedand updatedquarterly,withthe smoothedunitvaluecalculated daily.Prescribedadjustmentsto thesmoothedunitvalueareapplied quarterly,monthlyordaily, dependingonspecificmarket conditionrelatedtriggers. Ifthecustomerterminatesthe policythesmoothedunitvalueis paidout.Forthepurposesof determiningshareholdertransfers, thedifferencebetweenthe smoothedunitvalueonwithdrawal andtheinitialinvestmentistreated asaterminalbonus. Regularbonusesaretypically declaredonceayear,andonce credited,areguaranteedin accordancewiththetermsofthe particularproduct.Finalbonus ratesareguaranteedonlyuntilthe nextbonusdeclaration. Theshareholderreceivesoneninth ofthecostofbonusesdeclaredto thecustomerdistributedbythe typicalregularandfinalbonuses. TheliabilitiesforPruFundcontracts arecalculatedinaccordancewith themethodologyappliedtoother with-profitssub-fundcontracts, asdescribedbelow. Thepolicyholderliabilitiesreported fortheWPSFareprimarilyfortwo broadtypesofbusiness.Theseare accumulatingandconventional with-profitscontracts.The policyholderliabilitiesoftheWPSF areaccountedforinaccordance withtherequirementsof ‘grandfathered’FRS27. Forwith-profitsbusinessamarket consistentvaluationisperformed. Additionalassumptionsrequiredare forpersistencyandthemanagement actionsunderwhichthefundis managed.Assumptionsusedfora market-consistentvaluationtypically donotcontainmargins,whereasthose usedforthevaluationofotherclasses ofbusinessdo. www.prudential.co.uk AnnualReport2018 Prudential plc 259 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC4 Policyholder liabilities and unallocated surplus continued C4.2 Products and determining contract liabilities continued C4.2(c) UK and Europe continued Contract type Description Material features Determination of liabilities With-profits contracts in WPSF continued Innormalinvestmentconditions, PACexpectschangesinregular bonusratestobegradualovertime. However,PACretainsthediscretion whetherornottodeclarearegular bonuseachyear,andthereisno limitontheamountbywhichregular bonusratescanchange. Afinalbonuswhichisnormally declaredannually,maybeadded whenaclaimispaidorwhenunits ofaunitisedproductarerealised. Theratesoffinalbonususuallyvary bytypeofpolicyandbyreference totheperiod,usuallyayear,in whichthepolicycommencesor eachpremiumispaid.Theserates aredeterminedbyreferencetothe assetsharesforthesamplepolicies butsubjecttothesmoothing approachasexplainedopposite. Theprovisionshavebeendetermined onabasisconsistentwiththedetailed methodologyincludedinregulations containedinthePRA’spreviously issuedrulesforthedeterminationof reservesonthePRA’s‘realistic’Peak2 basis.Thoughnolongerinforcefor regulatorypurposes,theserules continuetobeappliedtodetermine with-profitscontractliabilitiesin accordancewithIFRS4.Inaggregate, theregimehastheeffectofplacinga valueontheliabilitiesofUKwith- profitscontracts,whichreflectsthe amountsexpectedtobepaidbasedon thecurrentvalueofinvestmentsheld bythewith-profitsfundsandcurrent circumstances.Thesecontractsare acombinationofinsuranceand investmentcontractswith discretionaryparticipationfeatures, asdefinedbyIFRS4. Theliabilitiescalculationunderthe realisticregimerequirementis explainedfurtherinnoteA3.1under theUKregulatedwith-profitssection. Persistencyassumptionsaresetbased ontheresultsofthemostrecent experienceanalysislookingatthe experienceoverrecentyearsofthe relevantbusiness. Maintenanceand,forsomeclasses ofbusiness,terminationexpense assumptionsareexpressedasper policyamounts.Theyaresetbasedon theexpensesincurredduringtheyear, includinganallowanceforongoing investmentexpenditureandallocated betweenentitiesandproductgroups inaccordancewiththeoperation’s internalcostallocationmodel.Expense inflationassumptionsaresetconsistent withtheeconomicbasisandbasedon theinflationswapspotcurve. Thecontractliabilitiesforwith-profits businessalsorequireassumptionsfor mortality.Thesearesetbasedonthe resultsofrecentexperienceanalysis. 260 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC4.2(c) UK and Europe continued Contract type Description Material features Determination of liabilities Provisionismadefortherisks attachingtosomeSAIFunitised with-profitspoliciesthathave (MarketValueReduction) MVR-freedatesandforthose SAIFproductswhichhavea guaranteedminimumbenefiton deathormaturityofpremiums accumulatedat4percentper annum. TheGroup’smainexposureto guaranteedannuitiesintheUK isthroughSAIFandaprovision of£361millionwasheldin SAIFat31December2018 (31December2017: £503million)tohonourthe guarantees.AsSAIFisa separatesub-fundsolelyforthe benefitofpolicyholdersofSAIF, thisprovisionhasnoimpacton thefinancialpositionofthe Group’sshareholders’equity. Asperwith-profitsproducts. SAIF with-profits Annuities – level, fixed increase and inflation- linked annuities SAIFisaring-fencedwith-profits sub-fundofPAC.Nonewbusiness iswritteninSAIF,althoughregular premiumsarestillbeingpaidon in-forcepolicies.Thefundissolely forthebenefitofpolicyholders ofSAIF.Shareholdershaveno interestintheprofitsofthisfund althoughtheyareentitledtoasset managementfeesonthisbusiness. Theprocessfordetermining policyholderbonusesofSAIF with-profitspolicies,issimilarto thatforthewith-profitspolicies oftheWPSF.However,inaddition, thesurplusassetsinSAIFare allocatedtopoliciesinanorderly andequitabledistributionover timeasenhancementsto policyholderbenefits. Level Provideafixedannuitypayment overthepolicyholder’slife. Fixed increase Provideforaregularannuity paymentwhichincorporates automaticincreasesinannuity paymentsbyfixedamountsoverthe policyholder’slife. Inflation-linked Provideforaregularannuity paymenttowhichanadditional amountisaddedperiodicallybased ontheincreaseintheUKRPI. With-profits Writteninthewith-profitsfund, thesecombinetheincomefeatures ofannuityproductswiththe investmentsmoothingfeaturesof with-profitsproductsandenable policyholderstoobtainexposureto investmentreturnonthewith- profitsfundequityshares,property andotherinvestmentcategories overtime. Theprocessofdetermining policyholderliabilitiesofSAIFissimilar tothatforthewith-profitspoliciesof theWPSF. Annuityliabilitiesarecalculatedasthe expectedfuturevalueoffutureannuity paymentsandexpensesdiscountedby avaluationinterestrate. Keyassumptionsinclude: Mortality Themortalityassumptionsaresetin lightofrecentpopulationandinternal experience.Theassumptionsused areadjustedpercentagesofstandard actuarialmortalitytableswithan allowanceforfuturemortality improvements,theeffectofanti- selectionandcharacteristicsspecific toeachindividualpolicyholder. Whereannuitieshavebeensoldon anenhancedbasistoimpairedlives anadditionalageadjustmentismade. Newmortalityprojectionmodelsare releasedannuallybytheContinuous MortalityInvestigation(CMI).The CMI2016modelwasusedtoproduce the2018resultscalibratedtoreflect anappropriateviewoffuture mortalityimprovements. Forannuitiesinpayment,themortality tablesusedaresetoutinC4.1(d)(iii). www.prudential.co.uk AnnualReport2018 Prudential plc 261 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC4 Policyholder liabilities and unallocated surplus continued C4.2 Products and determining contract liabilities continued C4.2(c) UK and Europe continued Contract type Description Material features Determination of liabilities Annuities – level, fixed increase and inflation- linked annuities continued Expense Maintenanceexpenseassumptionsare expressedasperpolicyamounts.They aresetbasedontheexpensesincurred duringtheyear,includinganallowance forongoinginvestmentexpenditure andallocatedbetweenentitiesand productgroupsinaccordancewiththe operation’sinternalcostallocation model.Amarginforadversedeviation isaddedtothisamount.Expense inflationassumptionsaresetconsistent withtheeconomicbasisandbasedon theinflationswapspotcurve. Valuation interest rates Valuationinterestratesusedto discounttheliabilitiesarebasedonthe yieldsasatthevaluationdateonthe assetsbackingthetechnicalprovisions. Forfixedinterestsecuritiestheinternal rateofreturnoftheassetsbackingthe liabilitiesisused.Propertiesarevalued usingtheredemptionyield,andfor equitiesitisthegreaterofthedividend yieldandtheaverageofthedividend yieldandtheearningsyield.An adjustmentismadetotheyieldon non-risk-freefixedinterestsecurities andpropertytoreflectcreditrisk. Credit risk ForIFRSreporting,theresultsforUK shareholder-backedannuitybusiness areparticularlysensitivetothe allowancesmadeforcreditriskonfixed interestsecurities.Furtherdetailson creditriskallowanceareprovidedin noteB3(ii). 262 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC4.2(c) UK and Europe continued Contract type Description Material features Determination of liabilities Unit-linked UKandEuropeinsurance operationsalsohaveabookof unit-linkedpolicies. Therearenoguaranteed maturityvaluesorguaranteed annuityoptionsonunit-linked policiesexceptforminor amountsforcertainpolicies linkedtocashunitswithinSAIF. Forunit-linkedcontractstheattaching liabilityreflectstheunitvalue obligationand,inthecaseofpolicies classifiedasinsurancecontracts, provisionforexpensesandmortality risk.Thelattercomponentis determinedbyapplyingmortality assumptionsonabasisthatis appropriateforthepolicyholder profile. Forthosecontractswherethelevelof insuranceriskisinsignificant,theassets andliabilitiesarisingunderthe contractsaredistinguishedbetween thosethatrelatetothefinancial instrumentliabilityandacquisition costsanddeferredincomethatrelate tothecomponentofthecontractthat relatestoinvestmentmanagement. Acquisitioncostsanddeferredincome arerecognisedconsistentwiththelevel ofserviceprovisioninlinewiththe requirementsofIFRS15. Tocalculatethenon-unitreservesfor linkedbusiness,assumptionshave beensetforthegrossunitgrowthrate andtherateofinflationofmaintenance expenses,aswellasforthevaluation interestrate. Operation of the UK with-profits sub-funds TheWPSFmainlycontainswith-profitsbusinessbutitalsocontainssomenon-profitbusiness(unit-linked,termassurancesand annuities).TheWPSF’sprofits,apportioned90percenttoitspolicyholdersand10percenttoshareholdersassurplusfordistribution, aredeterminedviatheannualactuarialvaluation. Application of significant judgement DeterminingbonusesusingthetabledescribedinthematerialfeaturestableaboverequiresthePACBoardtoapplysignificant judgementinmanyrespects,includinginparticularthefollowing: — Determiningwhatconstitutesfairtreatmentofcustomers; — Smoothingofinvestmentreturns;and — Determiningatwhatleveltosetbonusestoensurethattheyarecompetitive. www.prudential.co.uk AnnualReport2018 Prudential plc 263 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC4 Policyholder liabilities and unallocated surplus continued C4.2 Products and determining contract liabilities continued Key assumptions Theoverallrateofreturnoninvestmentsandtheexpectationoffutureinvestmentreturnsarethemostimportantinfluencesinbonus rates,subjecttothesmoothingdescribedbelow.Prudentialdeterminestheassumptionstoapplyinrespectofthesefactors,including theeffectsofreasonablylikelychangesinkeyassumptions,inthecontextoftheoverarchingdiscretionaryandsmoothingframework thatappliestoitswith-profitsbusiness.Assuch,itisnotpossibletospecificallyquantifytheeffectsofeachoftheseassumptions,orof reasonablylikelychangesintheseassumptions.  conceptuallywiththeapproachadoptedbyotherfirmsthatmanageawith-profitsbusinessandisalsoconsistentwiththerequirements ofthePrinciplesandPracticesofFinancialManagement(PPFM)thatareappliedinthemanagementoftheirwith-profitsfunds. Prudential’sapproach,inapplyingsignificantjudgementanddiscretioninrelationtodeterminingbonusrates,isconsistent Inaccordancewithindustry-wideregulatoryrequirements,thePACBoardhasappointed: — AchiefactuarywhoprovidesthePACBoardwithallactuarialadvice; — Awith-profitsactuarywhosespecificdutyistoadvisethePACBoardonthereasonablenessandproportionalityofthemannerin whichitsdiscretionhasbeenexercisedinapplyingtheprinciplesandpracticesoffinancialmanagementandthemannerinwhich anyconflictinginterestshavebeenaddressed;and — Awith-profitscommitteeofindependentindividuals,whichassessesthedegreeofcompliancewiththePPFMandthemannerin whichconflictingrightshavebeenaddressed. Determination of bonus rates IndeterminingbonusratesfortheUKwith-profitspolicies,smoothingisappliedtotheallocationoftheoverallearningsoftheUK with-profitsfundofwhichtheinvestmentreturnisasignificantelement.  Thedegreeofsmoothingisillustratednumericallybycomparinginthefollowingtabletherelatively‘smoothed’levelofpolicyholder bonusesdeclaredaspartofthesurplusfordistribution,withthemorevolatilemovementininvestmentreturnandotheritemsofincome andexpenditureoftheUKcomponentoftheUKwith-profitsfundforeachyearpresented. Netincomeofthefund: Investmentreturn Claimsincurred Movementinpolicyholderliabilities Addbackpolicyholderbonusesfortheyear(asshownbelow) Claimsincurredandmovementinpolicyholderliabilities (includingchargeforprovisionforassetsharesandexcludingpolicyholderbonuses) Earnedpremiums,netofreinsurance Otherincome Acquisitioncostsandotherexpenditure Shareofprofitsfrominvestmentjointventures Taxcredit(charge) Netincomeofthefundbeforemovementinunallocatedsurplus Movementinunallocatedsurplus Surplusfordistribution Surplusfordistributionallocatedasfollows: –90%policyholders'bonus(asshownabove) –10%shareholders’transfers 2018 £m 2017 £m (2,261) (8,776) (554) 2,345 (6,985) 12,505 36 (1,170) 36 273 2,434 170 2,604 9,985 (8,449) (10,011) 2,071 (16,389) 12,508 35 (1,732) 106 (440) 4,073 (1,769) 2,304 2,345 259 2,604 2,071 233 2,304 264 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC5 Intangible assets C5.1 Goodwill Carryingvalueatbeginningofyear AcquisitionofTMBAssetManagementCo.,Ltd.inThailand(seenoteD1.2) Otheradditionsintheyear(seebelow) Disposals/reclassificationstoheldforsale Exchangedifferences Carrying value at end of year Comprising: M&G–attributabletoshareholders Other–attributabletoshareholders Goodwill–attributabletoshareholders Venturefundinvestments–attributabletowith-profitsfunds 31 Dec 2018 £m 31 Dec 2017 £m Attributable to: Shareholders With-profits 1,458 181 – – 12 1,651 24 – 195 (10) (3) 206 Total 1,482 181 195 (10) 9 1,857 1,153 498 1,651 206 1,857 Total 1,628 – 9 (155) – 1,482 1,153 305 1,458 24 1,482 During2018,theUKwith-profitsfund,viaitsventurefundholdingsmanagedbyM&GPrudentialassetmanagement,madeasmall numberofacquisitionsthatareconsolidatedbytheGroupresultinginanadditiontogoodwillof£195million.Asthesetransactionsare withinthewith-profitsfund,theyhavenoimpactonshareholders’profitorequityfortheyearended31December2018.Theimpacton theGroup’sconsolidatedrevenue,includinginvestmentreturns,isnotmaterial.Hadtheacquisitionsbeeneffectedat1January2018, therevenueandprofitoftheGroupfor2018wouldnothavebeenmateriallydifferent. Impairment testing Goodwilldoesnotgeneratecashflowsindependentlyofothergroupsofassetsandthusisassignedtocash-generatingunitsforthe purposesofimpairmenttesting.Thesecash-generatingunitsarebaseduponhowmanagementmonitorsthebusinessandrepresentthe lowestleveltowhichgoodwillcanbeallocatedonareasonablebasis. Assessment of whether goodwill may be impaired Goodwillistestedforimpairmentbycomparingthecash-generatingunit’scarryingamount,includinganygoodwill,withitsrecoverable amount.TheGroup’smethodologyofassessingwhethergoodwillmaybeimpairedforacquiredlifeandassetmanagementoperationsis discussedbelow: M&G TherecoverableamountfortheM&Gbusiness(whichispartoftheUKandEuropeoperatingsegment)hasbeendeterminedby calculatingthevalueinuseofM&GGroupLimitedanditssubsidiaries(consideredtobeacash-generatingunitduring2018).Thishas beencalculatedbyaggregatingthepresentvalueoffuturecashflowsexpectedtobederivedfromtheM&Gbusiness. Thediscountedcashflowvaluationhasbeenbasedonathree-yearplanpreparedbyM&G,andapprovedbymanagement,andcash flowprojectionsforlateryears. Thevalueinuseisparticularlysensitivetoanumberofkeyassumptionsasfollows: — Thesetofeconomic,marketandbusinessassumptionsusedtoderivethethree-yearplan.Thedirectandsecondaryeffectsofrecent developments,suchaschangesinglobalequitymarketsandtrendsinfundflows,areconsideredbymanagementinarrivingatthe expectationsforthefinalprojectionsfortheplan; — Theassumedgrowthrateonforecastcashflowsbeyondtheterminalyearoftheplanafterconsideringexpectedfutureandpast growthrates.Agrowthrateof1.7percent(2017:1.7percent)hasbeenusedtoextrapolatebeyondtheplanperiod; — Theriskdiscountrate.Differingdiscountrateshavebeenappliedinaccordancewiththenatureoftheindividualcomponent businesses.Forthemostmaterialcomponentretailandinstitutionalbusiness,ariskdiscountrateof12percent(2017:12percent)has beenappliedtopost-taxcashflows.Thepre-taxriskdiscountratewas15percent(2017:15percent);and — Thatassetmanagementcontractscontinueonsimilarterms.Managementbelievesthatanyreasonablechangeinthekey assumptionswouldnotcausetherecoverableamountofM&Gtofallbelowitscarryingamount. www.prudential.co.uk AnnualReport2018 Prudential plc 265 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC5 Intangible assets continued C5.1 Goodwill continued Other goodwill attributable to shareholders OthergoodwillattributabletoshareholdersrepresentsamountsallocatedtoentitiesinAsiainrespectofbothacquiredasset managementandlifebusinesses.Thegoodwillinrespectofassetmanagementbusinessesat31December2018comprisedmainlythe goodwillarisingfromtheacquisitionofTMBAssetManagementCo.,Ltd.inThailandduringtheyear(seenoteD1.2).At31December 2018,therecoverableamountofthisbusinesshasbeendeterminedbyusingadiscountedcashflowvaluation. Foracquiredlifebusinesses,theCompanyroutinelycomparestheaggregateofnetassetvalueandacquiredgoodwillonanIFRS basisofacquiredlifebusinesswiththevalueofthecurrentin-forcebusinessasdeterminedusingtheEEVmethodology.Anyexcessof IFRSoverEEVcarryingvalueisthencomparedwithEEVbasisvalueofcurrentandprojectedfuturenewbusinesstodeterminewhether thereisanyindicationthatthegoodwillintheIFRSstatementoffinancialpositionmaybeimpaired.Themethodologyandassumptions underpinningtheGroup’sEEVbasisofreportingareincludedintheEEVbasissupplementaryinformationinthisAnnualReport. Venture fund investments Goodwillforventurefundinvestmentsistestedforimpairmentbycomparingthebusiness’scarryingvalue,includinggoodwilltoits recoverableamount(fairvaluelesscoststosell).Theaccumulatedimpairmentofgoodwillasat31December2018was£4.7million (31December2017:nil),whollyattributabletowith-profitsfunds. C5.2 Deferred acquisition costs and other intangible assets Deferredacquisitioncostsandotherintangibleassetsattributabletoshareholders note (i) Otherintangibleassets,includingcomputersoftware,attributabletowith-profitsfunds Totalofdeferredacquisitioncostsandotherintangibleassets (i) Deferred acquisition costs and other intangible assets attributable to shareholders Totaldeferredacquisitioncostsandotherintangibleassetsattributabletoshareholderscomprise: DeferredacquisitioncostsrelatedtoinsurancecontractsasclassifiedunderIFRS4 Deferredacquisitioncostsrelatedtoinvestmentmanagementcontracts,includinglifeassurancecontracts classifiedasfinancialinstrumentsandinvestmentmanagementcontractsunderIFRS4 Deferredacquisitioncostsrelatedtoinsuranceandinvestmentcontracts note (ii) Presentvalueofacquiredin-forcepoliciesforinsurancecontractsasclassifiedunderIFRS4(PVIF) Distributionrightsandotherintangibles Presentvalueofacquiredin-force(PVIF)andotherintangiblesattributabletoshareholders note (iii) 31 Dec 2018 £m 11,784 139 11,923 31 Dec 2017 £m 10,866 145 11,011 31 Dec 2018 £m 10,017 78 10,095 34 1,655 1,689 31 Dec 2017 £m 9,170 63 9,233 36 1,597 1,633 Totalofdeferredacquisitioncostsandotherintangibleassets note (a) 11,784 10,866 266 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedNotes (a) Total deferred acquisition costs and other intangible assets can be further analysed by business operations as follows: 31 Dec 2018 £m Deferred acquisition costs 31 Dec 2017 £m Balance at 1 January Additions Amortisationtotheincomestatement: note (c)† AdjustedIFRSoperatingprofitbasedon longer-terminvestmentreturns Non-operatingprofit Disposalsandtransfers Exchangedifferencesandothermovements AmortisationofDACrelatedtonetunrealised valuationmovementsontheUSinsurance operation’savailable-for-salesecuritiesrecognised withinothercomprehensiveincome Balance at 31 December Asia insurance 946 419 (148) – (148) – 47 US insurance note(b) 8,197 569 (683) (114) (797) – 512 – 1,264 246 8,727 UK and Europe insurance All asset manage- ment PVIF and other intangibles* Total Total 84 15 (11) – (11) – (2) – 86 6 15 (3) – (3) – – – 18 1,633 230 10,866 1,248 10,755 1,240 (179) (4) (183) (14) 23 (1,024) (118) (1,142) (14) 580 (709) 455 (254) – (799) – 246 (76) 1,689 11,784 10,866 *PVIFandotherintangiblescomprisePVIF,distributionrightsandotherintangiblessuchassoftwarerights.Distributionrightsrelatetoamountsthathavebeenpaidorhave becomeunconditionallydueforpaymentasaresultofpasteventsinrespectofbancassurancepartnershiparrangementsinAsia.Theseagreementsallowforbankdistribution ofPrudential’sinsuranceproductsforafixedperiodoftime.Softwarerightsincludeadditionsof£34million,amortisationof£32million,foreignexchangelossesof£7millionand abalanceat31December2018of£62million. †UndertheGroup’sapplicationofIFRS4,USGAAPisusedformeasuringtheinsuranceassetsandliabilitiesofitsUSandcertainAsiaoperations.UnderUSGAAP,mostofthe USinsuranceoperation’sproductsareaccountedforunderAccountingStandardsCodificationTopic944,FinancialServices–Insurance,oftheFinancialAccountingStandards Boardwherebydeferredacquisitioncostsareamortisedinlinewiththeemergenceofactualandexpectedgrossprofitswhicharedeterminedusinganassumptionforlong-term investmentreturnsfortheseparateaccountof7.4percent(2017:7.4percent)(grossofassetmanagementfeesandotherchargestopolicyholders,butnetofexternalfund managementfees).TheamountsincludedintheincomestatementandothercomprehensiveincomeaffectthepatternofprofitemergenceandthustheDACamortisation attaching.DACamortisationisallocatedtotheoperatingandnon-operatingcomponentsoftheGroup’ssupplementaryanalysisofprofitandothercomprehensiveincomeby referencetotheunderlyingitems(seenoteC7.3(iv)). (b) The DAC amount in respect of US insurance operations comprises amounts in respect of: Variableannuitybusiness Otherbusiness CumulativeshadowDAC(forunrealisedgainsbookedinothercomprehensiveincome)* TotalDACforUSoperations 31 Dec 2018 £m 31 Dec 2017 £m 8,477 299 (49) 8,727 8,208 278 (289) 8,197 *Againof£246million(2017:alossof£(76)million)forshadowDACamortisationisbookedwithinothercomprehensiveincometoreflecttheimpactfromthenegativeunrealised valuationmovementin2018of£1,617million(2017:positiveunrealisedvaluationmovementof£617million).Theseadjustmentsreflectmovementfromperiodtoperiod,inthe changestothepatternofreportedgrossprofitsthatwouldhaveoccurrediftheassetsreflectedinthestatementoffinancialpositionhadbeensold,crystallisingtheunrealised gainsandlosses,andtheproceedsreinvestedattheyieldscurrentlyavailableinthemarket.At31December2018,thecumulativeshadowDACbalanceasshowninthetable abovewasnegative£49million(31December2017:negative£289million). (c)        Furthermore,inthoseperiodswherethecaporfloorisrelevant,themeanreversiontechniqueprovidesnofurtherdampeningandadditionalvolatilitymayresult. In2018,theDACamortisationchargeforadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnswasdeterminedafterincludingadebitforaccelerated Sensitivity of amortisation charge TheamortisationchargetotheincomestatementisreflectedinbothadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsandshort-termfluctuationsin investmentreturns.TheamortisationchargetoadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsinareportingperiodcomprises: – Acoreamountthatreflectsarelativelystableproportionofunderlyingpremiumsorprofit;and – Anelementofaccelerationordecelerationarisingfrommarketmovementsdifferingfromexpectations. Inperiodswherethecapandfloorfeatureofthemeanreversiontechnique(whichisusedformoderatingtheeffectofshort-termvolatilityininvestmentreturns)arenotrelevant, thetechniqueoperatestodampenthesecondelementabove.Nevertheless,extrememarketmovementscancausematerialaccelerationordecelerationofamortisationinspite ofthisdampeningeffect.   amortisationof£194million(2017:creditfordeceleratedamortisationof£86million).Theaccelerationarisingin2018reflectsamechanicalincreaseintheprojectedseparate accountreturnforthenextfiveyearsunderthemean-reversiontechnique.Underthistechniquetheprojectedlevelofreturnforeachofthenextfiveyearsisadjustedsothat incombinationwiththeactualratesofreturnfortheprecedingthreeyears(includingthecurrentperiod)theassumedlong-termannualseparateaccountreturnof7.4percent isrealisedonaverageovertheentireeight-yearperiod.TheaccelerationinDACamortisationin2018isdrivenbothbytheactualseparatereturnintheyearbeinglowerthan thatassumedandbythelowerthanexpectedreturnin2015fallingoutoftheeight-yearperiodineffectreversingthedecelerationexperiencedin2015underthemean reversionformula.  themeanreversionassumptionlieswithinthecorridor.At31December2018,itwouldtakeapproximatemovementsinseparateaccountvaluesofmorethaneithernegative 22percentorpositive57percent(31December2017:negative32percentorpositive37percent)forthemeanreversionassumptiontomoveoutsidethecorridor. Theapplicationofthemeanreversionformula(describedinnoteA3.1)hastheeffectofdampeningtheimpactofequitymarketmovementsonDACamortisationwhile www.prudential.co.uk AnnualReport2018 Prudential plc 267 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information C5 Intangible assets continued C5.2 Deferred acquisition costs and other intangible assets continued (ii) Deferred acquisition costs related to insurance and investment contracts Themovementsindeferredacquisitioncostsrelatingtoinsuranceandinvestmentcontractsareasfollows: DAC at 1 January Additions Amortisation Exchangedifferences ChangeinshadowDACrelatedtomovementinunrealisedappreciationof Jackson’ssecuritiesclassifiedasavailable-for-sale DAC at 31 December 2018 £m 2017 £m Insurance contracts Investment management note Insurance contracts Investment management note 9,170 991 (947) 557 246 10,017 63 26 (11) – – 78 9,114 1,000 (77) (791) (76) 9,170 64 11 (12) – – 63 Note Alloftheadditionsarethroughinternaldevelopment.Thecarryingamountofthebalancecomprisesthefollowinggrossandaccumulatedamortisationamounts: Grossamount Accumulatedamortisation Net book amount 2018 £m 2017 £m 181 (103) 78 156 (93) 63 (iii) Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders At 1 January Cost Accumulatedamortisation Additions Amortisationcharge Disposalsandtransfers Exchangedifferencesandother movements At 31 December Comprising: Cost Accumulatedamortisation 2018 £m 2017 £m PVIF note(a) Distribution rights note(b) Other intangibles (including software) note(c) 227 (191) 36 – (4) – 2 34 232 (198) 34 1,793 (312) 1,481 181 (142) – 18 1,538 1,999 (461) 1,538 363 (247) 116 49 (37) (14) 3 117 313 (196) 117 Total 2,383 (750) 1,633 230 (183) (14) 23 1,689 2,544 (855) 1,689 PVIF note(a) Distribution rights note(b) Other intangibles (including software) note(c) 226 (183) 43 – (7) – – 36 227 (191) 36 1,628 (196) 1,432 173 (121) – (3) 1,481 1,793 (312) 1,481 321 (219) 102 56 (37) – (5) 116 363 (247) 116 Total 2,175 (598) 1,577 229 (165) – (8) 1,633 2,383 (750) 1,633 Notes (a) AllofthePVIFbalancesrelatetoinsurancecontracts.ThePVIFattachingtoinvestmentcontractshavebeenfullyamortised.Amortisationischargedovertheperiodofprovision ofassetmanagementservicesasthoseprofitsemerge. (b) DistributionrightsrelatetofeespaidinrelationtothebancassurancepartnershiparrangementsforthebankdistributionofPrudential’sinsuranceproductsforafixedperiod oftime.Thedistributionrightsamountsareamortisedonabasistoreflectthepatterninwhichthefutureeconomicbenefitsareexpectedtobeconsumedbyreferencetonew businessproductionlevels. Softwareisamortisedoveritsusefuleconomiclife,whichgenerallyrepresentsthelicenceperiodofthesoftwareacquired. (c) 268 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continued C6 Borrowings C6.1 Core structural borrowings of shareholder-financed businesses Holding company operations: note (i) US$250m6.75%Notes(Tier1) note (vi) US$300m6.5%Notes(Tier1) note (vi) US$700m5.25%Notes(Tier2) US$550m7.75%Notes(Tier1) note (v) US$1,000m5.25%Notes(Tier2) US$725m4.375%Notes(Tier2) US$750m4.875%Notes(Tier2) PerpetualSubordinatedCapitalSecurities ¤20mMediumTermNotes2023(Tier2) note (vii) £435m6.125%Notes2031(Tier2) £400m11.375%Notes2039(Tier2) £600m5%Notes2055(Tier2) £700m5.7%Notes2063(Tier2) £750m5.625%Notes2051(Tier2) note (iv) £500m6.25%Notes2068(Tier2) note (iv) US$500m6.5%Notes2048(Tier2) note (iv) SubordinatedNotes Subordinateddebttotal Seniordebt: note (ii) £300m6.875%Bonds2023 £250m5.875%Bonds2029 Bankloan note (iii) Holding company total PrudentialCapitalbankloan note (iii) JacksonUS$250m8.15%SurplusNotes2027 note (viii) Total (per consolidated statement of financial position) 31 Dec 2018 £m 31 Dec 2017 £m 196 235 550 – 780 565 583 185 222 517 407 731 530 548 2,909 3,140 18 431 399 591 696 743 498 391 3,767 6,676 294 223 275 7,468 – 196 7,664 18 430 397 591 696 – – – 2,132 5,272 300 249 – 5,821 275 184 6,280 Notes (i)  (ii) (iii) (iv)    (v) (vi) ThesedebttierclassificationsareconsistentwiththetreatmentofcapitalforregulatorypurposesundertheSolvencyIIregime. TheGrouphasdesignatedUS$3,725million(31December2017:US$4,275million)ofitsUSdollardenominatedsubordinateddebtasanetinvestmenthedgeunderIAS39to hedgethecurrencyrisksrelatedtothenetinvestmentinJackson. Theseniordebtranksabovesubordinateddebtintheeventofliquidation.In2018,aspartofitspreparationtodemergeM&GPrudential,theGroupmadecertainmodificationsto thetermsandconditionsoftheseniorbondswithbondholders’consent.Theamendmenttothetermsandconditionswillavoidaneventofatechnicaldefaultonthebonds,should thedemergerproceed.Thefeespaidtobondholdershavebeenadjustedtothecarryingvalueofthebondsandwillbeamortisedinsubsequentperiods.Nootheradjustments weremadetothecarryingvalueofthedebtasaresultofthemodification. Thebankloanof£275millionisdrawnatacostof12-monthGBPLIBORplus0.33percent.Theloan,heldbyPrudentialCapitalasof31December2017,wasrenewedinDecember 2018,withPrudentialplcbecomingthenewholder.Theloanmatureson20December2022withanoptiontorepayannually. InOctober2018,theCompanyissuedthefollowingthreesubstitutablecorestructuralborrowingsaspartoftheprocessrequiredbeforedemergertorebalancedebtacross M&GPrudentialandPrudential(seebelow): –£750million5.625percentTier2subordinatednotesdue2051.Theproceeds,netofcosts,were£743million; –£500million6.25percentTier2subordinatednotesdue2068.Theproceeds,netofcosts,were£498million;and –US$500million6.5percentTier2subordinatednotesdue2048.Theproceeds,netofcosts,were£389million(US$498million). InDecember2018,theCompanypaid£434milliontoredeemitsUS$550million7.75percentTier1perpetualsubordinatednotes. Theseborrowingscanbeconverted,inwholeorinpart,attheCompany’soptionandsubjecttocertainconditions,onanyinterestpaymentdate,intooneormoreseriesof Prudentialpreferenceshares. (vii) The¤20millionborrowingswereissuedat20-yearEuroConstantMaturitySwap(cappedat6.5percent).Thesehavebeenswappedintoborrowingsof£14millionwithinterest payableatthree-monthGBPLIBORplus1.2percent. Jackson’sborrowingsareunsecuredandsubordinatedtoallpresentandfutureindebtedness,policyclaimsandothercreditorclaimsofJackson. (viii) www.prudential.co.uk AnnualReport2018 Prudential plc 269 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC6 Borrowings continued C6.1 Core structural borrowings of shareholder-financed businesses continued Priortothedemerger,theGroupexpectstorebalanceitsdebtcapitalacrossPrudentialandM&GPrudential.Thiswillincludetheultimate holdingcompanyofM&GPrudentialbecominganissuerofnewdebt,includingdebtsubstitutedfromPrudential,andPrudential redeemingsomeofitsexistingdebt.Followingtheseactions,theoverallabsolutequantumofdebtacrossPrudentialandM&GPrudential iscurrentlyexpectedtoincrease,byanamountwhichisnotconsideredtobematerialinthecontextoftheGroup’stotaloutstandingdebt asat30June2018,beforeanysubstitutabledebthadbeenissued,of£7.6billion(comprisingtheGroup’scorestructuralborrowingsof £6.4billionandshareholderborrowingsfromshort-termfixedincomesecuritiesprogrammeof£1.2billion). Atthetimeofthedemerger,PrudentialexpectsM&GPrudentialtobeholdingaround£3.5billionofsubordinateddebt.This expectationissubjecttotheM&GPrudentialcapitalriskappetitebeingapprovedbytheBoardoftheultimateholdingcompanyof M&GPrudential,oncefullyconstitutedtoincludeindependentnon-executivedirectors,andreflectsthecurrentoperatingenvironment andeconomicconditions,materialchangesinwhichmayleadtoadifferentoutcome. Ratings PrudentialplchasdebtratingsfromStandard&Poor’s,Moody’sandFitch.Prudentialplc’slong-termseniordebtisratedA2byMoody’s, AbyStandard&Poor’sandA-byFitch. Prudentialplc’sshort-termdebtisratedasP-1byMoody’s,A-1byStandard&Poor’sandF1byFitch. ThefinancialstrengthofThePrudentialAssuranceCompanyLimitedisratedA+byStandard&Poor’s,Aa3byMoody’sand AA-byFitch. JacksonNationalLifeInsuranceCompany’sfinancialstrengthisratedAA-byStandard&Poor’sandFitch,A1byMoody’sand A+byA.M.Best. PrudentialAssuranceCo.Singapore(Pte)Ltd.’s(PrudentialSingapore)financialstrengthisratedAA-byStandard&Poor’s. AlltheGroup’sratingsareonastableoutlook. C6.2 Other borrowings (i) Operational borrowings attributable to shareholder-financed businesses CommercialPaper MediumTermNotes2018 Borrowingsinrespectofshort-termfixedincomesecuritiesprogrammes Bankloansandoverdrafts Obligationsunderfinanceleases Otherborrowings Otherborrowings note Total 31 Dec 2018 £m 31 Dec 2017 £m 472 – 472 90 19 417 526 998 485 600 1,085 70 5 631 706 1,791 Note OtherborrowingsmainlyincludeseniordebtissuedthroughtheFederalHomeLoanBankofIndianapolis(FHLB),securedbycollateralpostedwiththeFHLBbyJackson.Inaddition,other borrowingsincludeamountswhoserepaymenttothelenderiscontingentuponfuturesurplusemergingfromcertaincontractsspecifiedunderthearrangement.Ifinsufficientsurplus emergesonthosecontracts,thereisnorecoursetootherassetsoftheGroupandtheliabilityisnotpayabletothedegreeofshortfall. 270 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continued(ii) Borrowings attributable to with-profits businesses Non-recourseborrowingsofconsolidatedinvestmentfunds* £100m8.5%undatedsubordinatedguaranteedbondsofScottishAmicableFinanceplc† Otherborrowings(includingobligationsunderfinanceleases) Total 31 Dec 2018 £m 31 Dec 2017 £m 3,845 – 95 3,940 3,570 100 46 3,716 *Inallinstancestheholdersofthedebtinstrumentsissuedbythesesubsidiariesandfundsdonothaverecoursebeyondtheassetsofthesesubsidiariesandfunds. †TheinterestsoftheholdersofthebondsissuedbyScottishAmicableFinanceplc,asubsidiaryoftheScottishAmicableInsuranceFund,aresubordinatedtotheentitlementsofthe policyholdersofthatfund.Thesebondswereredeemedinfullon30June2018. C6.3 Maturity analysis ThefollowingtablesetsouttheremainingcontractualmaturityanalysisoftheGroup’sborrowingsasrecognisedinthestatementof financialposition: Lessthan1year 1to2years 2to3years 3to4years 4to5years Over5years Total Shareholder-financed businesses With-profits businesses Core structural borrowings Operational borrowings Borrowings 31 Dec 2018 £m 31 Dec 2017 £m 31 Dec 2018 £m 31 Dec 2017 £m 31 Dec 2018 £m 31 Dec 2017 £m – – – 275 312 7,077 7,664 275 – – – – 6,005 6,280 840 89 1 – – 68 998 1,723 1 1 – – 66 1,791 573 71 90 5 102 3,099 3,940 351 371 184 59 1 2,750 3,716 www.prudential.co.uk AnnualReport2018 Prudential plc 271 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC7 Risk and sensitivity analysis C7.1 Group overview The Group’s risk framework and the management of the risk, including those attached to the Group’s financial statements including  financial assets, financial liabilities and insurance liabilities, together with the inter-relationship with the management of capital have  been included in the audited sections of the ‘Chief Risk Officer’s Report of the risks facing our business and how these are managed’.  The financial and insurance assets and liabilities on the Group’s balance sheet are, to varying degrees, subject to market and insurance  risk and other changes of experience assumptions that may have a material effect on IFRS basis profit or loss and shareholders’ equity.  The market and insurance risks, including how they affect Group’s operations and how these are managed are discussed in the Risk  report referred to above. The most significant items that the IFRS shareholders’ profit or loss and shareholders’ equity for the Group’s life assurance business  are sensitive to, are shown in the following tables. The distinction between direct and indirect exposure is not intended to indicate the  relative size of the sensitivity. Type of business Market and credit risk Insurance and lapse risk Asia insurance operations (see also section C7.2) Investments/derivatives Liabilities/unallocated surplus Other exposure All business Currency risk With-profits business  Net neutral direct exposure (indirect exposure only) Unit-linked business  Net neutral direct exposure (indirect exposure only) Non-participating  business  Credit risk Asset/liability mismatch risk  Interest rates for those operations where the basis  of insurance liabilities is  sensitive to current market  movements Interest rate and price risk US insurance operations (see also section C7.3) All business Variable annuity  business Currency risk Net effect of market risk arising from incidence of guarantee  features and variability of asset management fees offset by  derivative hedging programme Fixed index annuity  business Derivative hedge programme  to the extent not fully hedged  against liability  Incidence of equity  participation features Fixed index annuities,  Fixed annuities and  GIC business Credit risk Interest rate risk  Profit and loss and shareholders’  equity are volatile for these risks as  they affect the values of derivatives  and embedded derivatives and  impairment losses. In addition,  shareholders’ equity is volatile  for the incidence of these risks  on unrealised appreciation of fixed  income securities classified as  available-for-sale under IAS 39 Mortality and  morbidity risk Persistency risk Investment performance  subject to smoothing  through declared  bonuses Investment performance  through asset  management fees Persistency risk Risk that utilisation of  withdrawal benefits  or lapse levels differ  from those assumed  in pricing Spread difference  between earned  rate and rate credited  to policyholders Lapse risk, but the  effects of extreme  events may be  mitigated by the  application of market  value adjustments  272  Prudential plc  Annual Report 2018  www.prudential.co.uk C Balance sheet notes continuedType of business Market and credit risk Insurance and lapse risk Investments/derivatives Liabilities/unallocated surplus Other exposure UK and Europe insurance operations (see also section C7.4) With-profits business  Net neutral direct exposure (indirect exposure only) SAIF sub-fund Net neutral direct exposure (indirect exposure only) Unit-linked business Net neutral direct exposure (indirect exposure only) Shareholder-backed annuity business Credit risk for assets covering  liabilities and shareholder capital Asset/liability mismatch risk Interest rate risk for assets in  excess of liabilities, ie assets  representing shareholder capital Investment performance  subject to smoothing  through declared  bonuses Asset management  fees earned Investment performance  through asset  management fees Persistency risk to  future shareholder  transfers Persistency risk Mortality experience  and assumptions  for longevity Detailed analysis of sensitivity of IFRS basis profit or loss and shareholders’ equity to key market and other risks by business unit is  provided in notes C7.2, C7.3, C7.4 and C7.5. The sensitivity analysis provided shows the effect on profit or loss and shareholders’ equity  to changes in the relevant risk variables, all of which are reasonably possible at the relevant balance sheet date. In the equity risk  sensitivity analysis shown below, the Group has considered the impact of an instantaneous 20 per cent fall in equity markets. If equity  markets were to fall by more than 20 per cent, the Group believes that this would not be an instantaneous fall but rather would be  expected to occur over a period of time during which the Group would be able to put mitigating management actions in place. In addition,  the equity risk sensitivity analysis provided assumed that all equity indices fall by the same percentage. Impact of diversification on risk exposure The Group benefits from diversification benefits achieved through the geographical spread of the Group’s operations and, within those  operations, through a broad mix of product types. Relevant correlation factors include: Correlation across geographic regions:  — Financial risk factors; and  — Non-financial risk factors. Correlation across risk factors:  — Longevity risk;  — Expenses;  — Persistency; and  — Other risks. The sensitivities below do not reflect that assets and liabilities are actively managed and may vary at the time any actual market movement  occurs. There are strategies in place to minimise the exposure to market fluctuations. For example, as market indices fluctuate, Prudential  would take certain actions including selling investments, changing investment portfolio allocation and adjusting bonuses credited to  policyholders. In addition, this analysis does not consider the effect of market changes on new business generated in the future. Other limitations on the sensitivities include: the use of hypothetical market movements to demonstrate potential risk that only  represent Prudential’s view of reasonably possible near-term market changes and that cannot be predicted with any certainty; the  assumption that interest rates in all countries move identically; the assumption that all global currencies move in tandem with the US  dollar against pound sterling; and the lack of consideration of the inter-relation of interest rates, equity markets and foreign currency  exchange rates.  www.prudential.co.uk  Annual Report 2018  Prudential plc  273 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC7 Risk and sensitivity analysis continued C7.2 Asia insurance operations Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks The Asia operations sell with-profits and unit-linked policies, and the investment portfolio of the with-profits funds contains a proportion  of equities. Non-participating business is largely backed by debt securities or deposits. The Group’s exposure to market risk arising from  its Asia operations is therefore at modest levels. This reflects the fact that the Asia operations have a balanced portfolio of with-profits,  unit-linked and other types of business. In Asia, adverse persistency experience can impact the IFRS profitability of certain types of business written in the region. This risk is  managed at a business unit level through regular monitoring of experience and the implementation of management actions as necessary.  These actions could include product enhancements, increased management focus on premium collection, as well as other customer  retention efforts. The potential financial impact of lapses is often mitigated through the specific features of the products, eg surrender  charges, or through the availability of premium holiday or partial withdrawal policy features. In summary, for Asia operations, the adjusted IFRS operating profit based on longer-term investment returns is mainly affected by the  impact of market levels on unit-linked persistency, and other insurance risks. At the total IFRS profit level the Asia result is affected by  short-term value movements on the asset portfolio for non-linked shareholder-backed business.  (i) Sensitivity to risks other than foreign exchange risk Interest rate risk Excluding its with-profits and unit-linked businesses, the results of the Asia business are sensitive to the movements in interest rates. For the purposes of analysing sensitivity to variations in interest rates, reference has been made to the movements in the 10-year  government bond rates of the territories. At 31 December 2018, 10-year government bond rates vary from territory to territory and range  from 0.9 per cent to 8.1 per cent (31 December 2017: 1.0 per cent to 7.5 per cent).  For the sensitivity analysis as shown in the table below, the reasonably possible interest rate movement used is 1 per cent for all local  business units.  The estimated sensitivity to the decrease and increase in interest rates is as follows: Profit before tax attributable to shareholders Related deferred tax (where applicable) Net effect on profit and shareholders’ equity 2018  £m 2017  £m Decrease of 1% Increase of 1% Decrease of 1% Increase of 1% 312 (15) 297 (338) 26 (312) 2 (7) (5) (443) 20 (423) The pre-tax impacts, if they arose, would mostly be recorded within the category short-term fluctuations in investments returns in the  Group’s segmental analysis of profit before tax.  The degree of sensitivity of the results of the non-linked shareholder-backed business of the Asia operations to movements in interest  rates depends upon the degree to which the liabilities under the ‘grandfathered’ IFRS 4 measurement basis reflects market interest rates  from period-to-period. For example for countries applying US GAAP, the results can be more sensitive as the effect of interest rate  movements on the backing investments may not be offset by liability movements.  In addition, the degree of sensitivity of the results shown in the table above is dependent on the interest rate level at that point in time.  An additional factor to the direction of the sensitivity of the Asia operations as a whole is movement in the country mix. Equity price risk The non-linked shareholder-backed business has limited exposure to equity and property investment (31 December 2018:  £2,151 million; 31 December 2017: £1,764 million). Generally, changes in equity and property investment values are not directly offset by  movements in non-linked policyholder liabilities.  The estimated sensitivity to a 10 per cent and 20 per cent change in equity and property prices for shareholder-backed Asia other  business (including those held by the Group’s joint venture and associate businesses), which would be reflected in the short-term  fluctuation component of the Group’s segmental analysis of profit before tax, is as follows: Profit before tax attributable to shareholders Related deferred tax (where applicable) Net effect on profit and shareholders’ equity 2018  £m Decrease 2017  £m Decrease of 20% of 10% of 20% of 10% (557) 17 (540) (279) 8 (271) (478) 7 (471) (239) 4 (235) A 10 or 20 per cent increase in equity and property values would have an approximately equal and opposite effect on profit and  shareholders’ equity to the sensitivities shown above. 274  Prudential plc  Annual Report 2018  www.prudential.co.uk C Balance sheet notes continued Insurance risk Many of the business units in Asia are exposed to mortality/morbidity risk and provision is made within policyholder liabilities on a prudent  regulatory basis to cover the potential exposure. If these prudent assumptions were strengthened by 5 per cent then it is estimated that  post-tax profit and shareholders’ equity would be decreased by approximately £57 million (2017: £66 million). Mortality and morbidity have  a broadly symmetrical effect on the portfolio and any weakening of these assumptions would have a similar equal and opposite impact. (ii) Sensitivity to foreign exchange risk Consistent with the Group’s accounting policies, the profits of the Asia insurance operations are translated at average exchange rates  and shareholders’ equity at the closing rate for the reporting period. For 2018, the rates for the most significant operations are given  in note A1.  A 10 per cent increase (strengthening of the pound sterling) or decrease (weakening of the pound sterling) in these rates would have  reduced or increased profit before tax attributable to shareholders, profit for the year and shareholders’ equity, excluding goodwill  attributable to Asia insurance operations respectively as follows: Profit before tax attributable to shareholders  Profit for the year Shareholders’ equity, excluding goodwill, attributable to Asia operations A 10% increase in local currency to £ exchange rates A 10% decrease in local currency to £ exchange rates 2018  £m 2017  £m 2018  £m 2017  £m (134) (113) (543) (155) (135) (492) 164 138 664 189 165 601 C7.3 US insurance operations Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks Jackson’s reported adjusted IFRS operating profit based on longer-term investment returns is sensitive to market conditions, both with  respect to income earned on spread-based products and indirectly with respect to income earned on variable annuity asset management  fees. Jackson’s main exposures to market risk are to interest rate risk and equity risk. Jackson is exposed primarily to the following risks: Risks Equity risk Risk of loss  — Related to the incidence of benefits related to guarantees issued in connection with its variable annuity  contracts; and  — Related to meeting contractual accumulation requirements in fixed index annuity contracts. Interest rate risk  — Related to meeting guaranteed rates of accumulation on fixed annuity products following a sustained fall  in interest rates;  — Related to increases in the present value of projected benefits related to guarantees issued in connection with  its variable annuity contracts following a sustained fall in interest rates especially if in conjunction with a fall in  equity markets;  — Related to the surrender value guarantee features attached to the Company’s fixed annuity products and to  policyholder withdrawals following a sharp and sustained increase in interest rates; and  — The risk of mismatch between the expected duration of certain annuity liabilities and prepayment risk and  extension risk inherent in mortgage-backed securities. www.prudential.co.uk  Annual Report 2018  Prudential plc  275 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information    C7 Risk and sensitivity analysis continued C7.3 US insurance operations continued Jackson’s derivative programme is used to manage interest rate risk associated with a broad range of products and equity market risk  attaching to its equity-based products. Movements in equity markets, equity volatility, interest rates and credit spreads materially affect  the carrying value of derivatives that are used to manage the liabilities to policyholders and backing investment assets. Movements in  the carrying value of derivatives combined with the use of US GAAP measurement (as ‘grandfathered’ under IFRS 4) for the insurance  contracts assets and liabilities, which is largely insensitive to current period market movements, mean that the Jackson total profit  (ie including short-term fluctuations in investment returns) is sensitive to market movements. In addition to these effects the Jackson  shareholders’ equity is sensitive to the impact of interest rate and credit spread movements on the value of fixed income securities.  Movements in unrealised appreciation on these securities are included as movement in shareholders’ equity (ie outside the income  statement).  Jackson enters into financial derivative transactions, including those noted below to reduce and manage business risks. These  transactions manage the risk of a change in the value, yield, price, cash flows or quantity of, or a degree of exposure, with respect to  assets, liabilities or future cash flows, which Jackson has acquired or incurred. Jackson uses free-standing derivative instruments for hedging purposes. Additionally, certain liabilities, primarily trust instruments  supported by funding agreements, fixed index annuities, certain variable annuity guaranteed benefit features and reinsured Guaranteed  Minimum Income Benefit variable annuity features are similar to derivatives. Jackson does not account for such items as either fair  value or cash flow hedges as might be permitted if the specific hedge documentation requirements of IAS 39 were followed. Financial  derivatives are carried at fair value, including derivatives embedded in certain host liabilities where these are required to be  valued separately. The principal types of derivatives used by Jackson and their purpose are as follows: Derivative Purpose Interest rate swaps These generally involve the exchange of fixed and floating payments over the period for which Jackson holds  the instrument without an exchange of the underlying principal amount. These agreements are used to hedge  Jackson’s exposure to movements in interest rates. Swaption contracts These contracts provide the purchaser with the right, but not the obligation, to require the writer to pay the  present value of a long-duration interest rate swap at future exercise dates. Jackson both purchases and writes  swaptions in order to hedge against significant movements in interest rates. Treasury futures  contracts Equity index futures  contracts and equity  index options These derivatives are used to hedge Jackson’s exposure to movements in interest rates.  These derivatives (including various call and put options and options contingent on interest rates and currency  exchange rates) are used to hedge Jackson’s obligations associated with its issuance of certain VA guarantees.  Some of these annuities and guarantees contain embedded options that are fair valued for financial  reporting purposes. Cross-currency swaps Cross-currency swaps, which embody spot and forward currency swaps and additionally, in some cases,  interest rate swaps and equity index swaps, are entered into for the purpose of hedging Jackson’s foreign  currency denominated funding agreements supporting trust instrument obligations. Credit default swaps These swaps represent agreements under which the buyer has purchased default protection on certain  underlying corporate bonds held in its portfolio. These contracts allow Jackson to sell the protected bonds at par  value to the counterparty if a default event occurs in exchange for periodic payments made by Jackson for the life  of the agreement. The estimated sensitivity of Jackson’s profit and shareholders’ equity to equity and interest rate risks provided below is net of the  related changes in amortisation of DAC. The effect on the related changes in amortisation of DAC provided is based on the current  ‘grandfathered’ US GAAP DAC basis but does not include any effect from an acceleration or deceleration of amortisation of DAC.  276  Prudential plc  Annual Report 2018  www.prudential.co.uk C Balance sheet notes continued(i) Sensitivity to equity risk Jackson had variable annuity contracts with guarantees, for which the net amount at risk (NAR) is defined as the amount of guaranteed  benefit in excess of current account value, as follows: 31 December 2018 Return of net deposits plus a minimum return GMDB GMWB – premium only GMWB* GMAB – premium only Highest specified anniversary account value minus withdrawals  post-anniversary GMDB GMWB – highest anniversary only GMWB* Combination net deposits plus minimum return, highest  specified anniversary account value minus withdrawals  post-anniversary GMDB GMIB‡ GMWB* 31 December 2017 Return of net deposits plus a minimum return GMDB GMWB – premium only GMWB* GMAB – premium only Highest specified anniversary account value minus withdrawals  post-anniversary GMDB GMWB – highest anniversary only GMWB* Combination net deposits plus minimum return, highest  specified anniversary account value minus withdrawals  post-anniversary GMDB GMIB‡ GMWB* Minimum return 0-6% 0% 0-5%† 0% Account value £m 98,653 1,924 197 26 8,531 2,220 535 0-6% 0-6% 0-8%† 5,454 1,256 91,788 Minimum return 0-6% 0% 0-5%† 0% Account value £m 100,451 2,133 235 38 9,099 2,447 667 0-6% 0-6% 0-8%† 5,694 1,484 93,227 Net amount at risk £m Weighted average attained age Period until expected annuitisation 4,437 62 20 – 1,113 314 89 1,217 648 16,835 Net amount at risk £m 1,665 20 13 – 96 51 47 426 436 4,393 66.5 years 67.1 years 69.5 years 0.1 years Weighted average attained age Period until expected annuitisation 66.0 years 66.5 years 69.0 years 0.4 years * Amounts shown for GMWB comprise sums for the ‘not for life’ portion (where the guaranteed withdrawal base less the account value equals to the net amount at risk (NAR)), and a  ‘for life’ portion (where the NAR has been estimated as the present value of future expected benefit payment remaining after the amount of the ‘not for life’ guaranteed benefits is zero).  † Ranges shown based on simple interest. The upper limits of 5 per cent or 8 per cent simple interest are approximately equal to 4.1 per cent and 6 per cent respectively, on a compound  interest basis over a typical 10-year bonus period. For example 1 + 10 x 0.05 is similar to 1.04 growing at a compound rate of 4 per cent for a further nine years. ‡ The GMIB guarantees are substantially reinsured. www.prudential.co.uk  Annual Report 2018  Prudential plc  277 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information        C7 Risk and sensitivity analysis continued C7.3 US insurance operations continued Account balances of contracts with guarantees were invested in variable separate accounts as follows: Mutual fund type: Equity Bond Balanced Money market Total 31 Dec 2018 £m 31 Dec 2017 £m 78,387 13,901 19,903 824 80,843 13,976 19,852 681 113,015 115,352 As noted above, Jackson is exposed to equity risk through the options embedded in the fixed index annuity liabilities and guarantees  included in certain variable annuity benefits as illustrated above. This risk is managed using an equity hedging programme to minimise  the risk of a significant economic impact as a result of increases or decreases in equity market levels. Jackson purchases futures and  options that hedge the risks inherent in these products, while also considering the impact of rising and falling guaranteed benefit fees. Due to the nature of valuation under IFRS of the free-standing derivatives and the variable annuity guarantee features, this hedge,  while highly effective on an economic basis, would not automatically offset within the financial statements as the impact of equity market  movements resets the free-standing derivatives immediately while the hedged liabilities reset more slowly and fees are recognised  prospectively in the period in which they are earned.   In addition to the exposure explained above, Jackson is also exposed to equity risk from its holding of equity securities, partnerships  in investment pools and other financial derivatives. The estimated sensitivity of Jackson’s profit and shareholders’ equity to immediate increases and decreases in equity markets  is shown below. The sensitivities are shown net of related changes in DAC amortisation, as described above. Pre-tax profit, net of related changes  in amortisation of DAC  Related deferred tax effects Net sensitivity of profit after tax  and shareholders’ equity* 31 Dec 2018  £m 31 Dec 2017  £m Decrease Increase Decrease Increase of 20% of 10% of 20% of 10% of 20% of 10% of 20% of 10% 1,058 (222) 427 (90) 58 (12) (125) 26 1,107 (233) 336 (71) 619 (130) 262 (55) 836 337 46 (99) 874 265 489 207 * The table above has been prepared to exclude the impact of the instantaneous equity movements on the separate account fees. In addition, the sensitivity movements shown include  those relating to the fixed index annuity and the reinsurance of GMIB guarantees.  The above table provides sensitivity movements at a point in time while the actual impact on financial results would vary contingent upon  the volume of new product sales and lapses, changes to the derivative portfolio, correlation of market returns and various other factors  including volatility, interest rates and elapsed time.  The directional movements in the sensitivities reflect the hedging programme in place at 31 December 2018 and 2017. 278  Prudential plc  Annual Report 2018  www.prudential.co.uk C Balance sheet notes continued(ii) Sensitivity to interest rate risk Except in the circumstances of interest rate scenarios where the guarantee rates included in contract terms are higher than crediting rates  that can be supported from assets held to cover liabilities, the accounting measurement of fixed annuity liabilities of Jackson’s products is  not generally sensitive to interest rate risk. This position derives from the nature of the products and the US GAAP basis of measurement.  The GMWB features attached to variable annuity business (other than ‘for life’ components) are accounted for under US GAAP at fair  value and, therefore, will be sensitive to changes in interest rates. Debt securities and related derivatives are marked to fair value. Value movements on derivatives, again net of related changes to  amortisation of DAC and deferred tax, are recorded within the income statement. Fair value movements on debt securities, net of related  changes to amortisation of DAC and deferred tax, are recorded within other comprehensive income. The estimated sensitivity of these  items and policyholder liabilities to a 1 per cent and 2 per cent decrease and increase in interest rates is as follows: 31 Dec 2018  £m 31 Dec 2017  £m Decrease Increase Decrease Increase of 2% of 1% of 1% of 2% of 2% of 1% of 1% of 2% Profit and loss: Pre-tax profit effect (net of related changes  in amortisation of DAC) Related effect on charge for deferred tax (3,535) 742 (1,718) 361 1,201 (252) 2,210 (464) (4,079) 857 (1,911) 401 Net profit effect (2,793) (1,357) 949 1,746 (3,222) (1,510) 1,373 (288) 1,085 2,533 (532) 2,001 Other comprehensive income: Direct effect on carrying value of debt  securities (net of related changes in  amortisation of DAC) Related effect on movement in deferred tax Net effect  4,134 (868) 2,346 (493) (2,346) 493 (4,134) 868 3,063 (643) 3,266 1,853 (1,853) (3,266) 2,420 Total net effect on shareholders’ equity 473 496 (904) (1,520) (802) 1,700 (357) 1,343 (167) (1,700) 357 (3,063) 643 (1,343) (2,420) (258) (419) These sensitivities are shown for interest rates in isolation only and do not include other movements in credit risk that may affect credit  spreads and valuations of debt securities. Similar to the sensitivity to equity risk, the sensitivity movements provided in the table above  are at a point in time and reflect the hedging programme in place on the balance sheet date, while the actual impact on financial results  would vary contingent upon a number of factors. (iii) Sensitivity to foreign exchange risk Consistent with the Group’s accounting policies, the profits of the Group’s US operations are translated at average exchange rates and  shareholders’ equity at the closing rate for the reporting period. For 2018, the average and closing rates were US$1.34 (31 December  2017: US$1.29) and US$1.27 (31 December 2017: US$1.35) to £1.00 sterling respectively. A 10 per cent increase (weakening of the  dollar) or decrease (strengthening of the dollar) in these rates would reduce or increase profit before tax attributable to shareholders,  profit for the year and shareholders’ equity attributable to US insurance operations respectively as follows: Profit before tax attributable to shareholders  Profit for the year Shareholders’ equity attributable to US insurance operations A 10% increase in US$:£ exchange rates A 10% decrease in US$:£ exchange rates 2018  £m  2017  £m  2018  £m  2017  £m  (159) (136) (508) (54) (20) (456) 194 166 620 66 24 557 www.prudential.co.uk  Annual Report 2018  Prudential plc  279 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC7 Risk and sensitivity analysis continued C7.3 US insurance operations continued (iv) Other sensitivities The total profit of Jackson is sensitive to market risk on the assets covering liabilities other than variable annuity business segregated  in the separate accounts. For term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity and interest-sensitive life  business, acquisition costs are deferred and amortised in line with expected gross profits on the relevant contracts. For interest-sensitive  business, the key assumption is the expected long-term spread between the earned rate and the rate credited to policyholders. In addition,  expected gross profits depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the related  charges) all of which are based on a combination of actual experience of Jackson, industry benchmarking and future expectations.  A detailed analysis of actual experience is measured by internally developed expense, mortality and persistency studies. For variable annuity business, an assumption made is the expected long-term level of separate account returns, which for 2018 was  7.4 per cent (2017: 7.4 per cent). The impact of using this return is reflected in two principal ways, namely:  — Through the projected expected gross profits that are used to determine the amortisation of deferred acquisition costs. This is applied  through the use of a mean reversion technique which is described in more detail in note A3.1 above; and  — The required level of provision for claims for guaranteed minimum death, ‘for life’ withdrawal, and income benefits. Jackson is sensitive to mortality risk, lapse risk and other types of policyholder behaviour, such as the utilisation of its GMWB product  features. Jackson’s persistency assumptions reflect a combination of recent experience for each relevant line of business and expert  judgement, especially where a lack of relevant and credible experience data exists. These assumptions vary by relevant factors, such as  product, policy duration, attained age and for variable annuity lapse assumptions, the extent to which guaranteed benefits are ‘in the  money’ relative to policy account values. Changes in these assumptions, which are assessed on an annual basis after considering recent  experience, could have a material impact on policyholder liabilities and therefore on profit before tax. See further information in note B1.2. In addition, in the absence of hedging, equity and interest rate movements can both cause a loss directly or an increased future  sensitivity to policyholder behaviour. Jackson has an extensive derivative programme that seeks to manage the exposure to such altered  equity markets and interest rates. C7.4 UK and Europe insurance operations Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks The IFRS basis results of the shareholder-backed business for the UK and Europe insurance operations are most sensitive to the following  factors:  — Asset/liability matching;  — Default rate experience;  — Annuitant mortality; and  — The difference between the rates of return on corporate bonds and risk-free rates.   Further details are described below.  The adjusted IFRS operating profit based on longer-term investment returns for UK and Europe insurance operations is sensitive to  changes in longevity assumptions affecting the carrying value of liabilities to policyholders for UK shareholder-backed annuity business.  At the total IFRS profit level, the result is particularly sensitive to temporary value movements on assets backing the capital of the  shareholder-backed annuity business. With-profits business With-profits sub-fund business The shareholder results of the UK with-profits business (including non-participating annuity business of the with-profits sub-fund)  are only sensitive to market risk through the indirect effect of investment performance on declared policyholder bonuses.  The investment assets of UK with-profits funds are subject to market risk. Changes in their carrying value, net of related changes  to asset-share liabilities of with-profits contracts, affect the level of unallocated surplus of the fund. Therefore, the level of unallocated  surplus is particularly sensitive to the level of investment returns on the portion of the assets that represents surplus. However,  as unallocated surplus is accounted for as a liability under IFRS, movements in its value do not affect shareholders’ profit and equity. The shareholder results of the UK with-profits fund are currently one-ninth of the cost of bonuses declared to with-profits  policyholders. For certain unitised with-profits products, such as the PruFund range of funds, the bonuses represent the policyholders’  net return based on the smoothed unit price of the selected investment fund. Investment performance is a key driver of bonuses declared,  and hence the shareholder results. Due to the ‘smoothed’ basis of bonus declaration, the sensitivity to short-term investment performance  is relatively low. However, longer-term investment performance and persistency trends may affect future shareholder transfers.  280  Prudential plc  Annual Report 2018  www.prudential.co.uk C Balance sheet notes continuedShareholder-backed annuity business Profits from shareholder-backed annuity business are most sensitive to:  — The extent to which the duration of the assets held closely matches the expected duration of the liabilities under the contracts;   — Actual versus expected default rates on assets held;  — The difference between long-term rates of return on corporate bonds and risk-free rates;  — The variance between actual and expected mortality experience;  — The extent to which changes to the assumed rate of improvements in mortality give rise to changes in the measurement of liabilities;  and  — Changes in renewal expense levels. In addition, the level of profit is affected by change in the level of reinsurance cover. A decrease in assumed mortality rates of 1 per cent would decrease pre-tax profit by approximately £37 million (2017: £66 million).  A decrease in credit default assumptions of five basis points would increase pre-tax profit by £99 million (2017: £198 million). A decrease  in renewal expenses (excluding asset management expenses) of 5 per cent would increase pre-tax profit by £21 million (2017: £40 million).  The effect on profit would be approximately symmetrical for changes in assumptions that are directionally opposite to those explained  above. The net effect on profit after tax and shareholders’ equity from all the changes in assumptions as described above would be an  increase of approximately £69 million (2017: £143 million). See C4.1(d)(iii) for further details on mortality assumptions. Unit-linked and other business Unit-linked and other business represents a comparatively small proportion of the in-force business of the UK and Europe insurance  operations.  Due to the matching of policyholder liabilities to attaching asset value movements, the UK unit-linked business is not directly affected  by market or credit risk. The liabilities of other business are also broadly insensitive to market risk. Profits from unit-linked and similar  contracts primarily arise from the excess of charges to policyholders for management of assets, over expenses incurred. The former is most  sensitive to the net accretion of funds under management as a function of new business, persistency and timing of death. The accounting  impact of the latter is dependent upon the amortisation of acquisition costs in line with the emergence of margins (for insurance contracts)  and amortisation in line with service provision (for the investment management component of investment contracts). By virtue of the  design features of most of the contracts that provide low levels of mortality cover, the profits are relatively insensitive to changes in  mortality experience. Sensitivity to interest rate risk and other market risk By virtue of the fund structure, product features and basis of accounting, the policyholder liabilities of the UK and Europe insurance  operations are, except annuity business, not generally exposed to interest rate risk. At 31 December 2018, annuity liabilities accounted  for 95 per cent (31 December 2017: 98 per cent) of UK non-linked shareholder-backed business liabilities. For annuity business, liabilities  are exposed to interest rate risk. However, the net exposure is substantially ameliorated by virtue of the close matching of assets with  appropriate duration. The level of matching from period to period can vary depending on management actions and economic factors  so it is possible for a degree of mis-matching profits or losses to arise.  The close matching by the Group of assets of appropriate duration to annuity liabilities is based on maintaining economic and  regulatory capital. Liabilities are measured differently under Solvency II reporting requirements than under IFRS resulting in an alteration  to the assets used to measure the IFRS annuity liabilities. As a result, IFRS has a different sensitivity to interest rate and credit risk than  under Solvency II. The estimated sensitivity of the UK non-linked shareholder-backed business (principally annuities business) to a movement in interest  rates is as follows: 31 Dec 2018  £m 31 Dec 2017  £m A decrease of 2% A decrease of 1% An increase of 1% An increase of 2% A decrease of 2% A decrease of 1% An increase of 1% An increase of 2% Carrying value of debt securities and derivatives Policyholder liabilities  Related deferred tax effects 7,369 (4,784) (446) 3,317 (2,162) (199) (2,792) 1,801 171 (5,193) 3,317 323 13,497 (9,426) (658) 5,805 (4,210) (254) (4,659) 3,443 190 (8,541) 6,295 348 Net sensitivity of profit after tax and  shareholders’ equity 2,139 956 (820) (1,553) 3,413 1,341 (1,026) (1,898) www.prudential.co.uk  Annual Report 2018  Prudential plc  281 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC7 Risk and sensitivity analysis continued C7.4 UK and Europe insurance operations continued In addition, the shareholder-backed portfolio of UK non-linked insurance operations (covering policyholder liabilities and shareholders’  equity) includes equity securities and investment properties. Excluding any offsetting effects on the measurement of policyholder  liabilities, a fall in their value would have given rise to the following effects on pre-tax profit, profit after tax and shareholders’ equity. Pre-tax profit Related deferred tax effects Net sensitivity of profit after tax and shareholders’ equity 2018  £m 2017  £m A decrease of 20% A decrease of 10% A decrease of 20% A decrease of 10% (336) 57 (279) (168) 29 (139) (332) 57 (275) (166) 28 (138) A 10 or 20 per cent increase in their value would have an approximately equal and opposite effect on profit and shareholders’ equity  to the sensitivities shown above. The market risk sensitivities shown above reflect the impact of temporary market movements and,  therefore, the primary effect of such movements would, in the Group’s segmental analysis of profits, be included within the short-term  fluctuations in investment returns. C7.5 Asset management and other operations (i) Asset management (a) Sensitivities to foreign exchange risk Consistent with the Group’s accounting policies, the profits of Eastspring Investments and US asset management operations are  translated at average exchange rates and shareholders’ equity at the closing rate for the reporting period. The rates for the functional  currencies of most significant operations are shown in note A1. A 10 per cent increase in the relevant exchange rates (strengthening of the pound sterling) would have reduced reported profit before  tax attributable to shareholders, and shareholders’ equity excluding goodwill attributable to Eastspring Investments and US asset  management operations, by £10 million and £43 million respectively (2017: £30 million and £53 million, respectively). (b) Sensitivities to other financial risks for asset management operations The profits of asset management businesses are sensitive to the level of assets under management, as this significantly affects the value  of management fees earned by the business in the current and future periods. The Group’s asset management operations do not hold  significant investments in property or equities. (ii) Other operations The Group holds certain derivatives that are used to manage foreign currency movements and macroeconomic exposures. The fair value  of these derivatives is sensitive to the combined effect of movements in exchange rates, interest rates and inflation rates. The possible  permutations cover a wide range of scenarios. For indicative purposes, a reasonably possible range of fair value movements based on  historical experience could be plus or minus £150 million. Other operations are sensitive to credit risk on the loan portfolio of the Prudential Capital operation. Total debt securities held at  31 December 2018 by Prudential Capital were £1,884 million (2017: £2,238 million). Debt securities held by Prudential Capital are  in general variable rate bonds and so market value is limited in sensitivity to interest rate movements and consequently any change in  interest rates would not have a material impact on profit or shareholders’ equity. 282  Prudential plc  Annual Report 2018  www.prudential.co.uk C Balance sheet notes continuedC8 Tax assets and liabilities C8.1 Deferred tax Thestatementoffinancialpositioncontainsthefollowingdeferredtaxassetsandliabilitiesinrelationto: Deferred tax assets Unrealisedlossesorgainsoninvestments Balancesrelatingtoinvestmentandinsurancecontracts Short-termtemporarydifferences Capitalallowances Unusedtaxlosses Total Deferred tax liabilities Unrealisedlossesorgainsoninvestments Balancesrelatingtoinvestmentandinsurancecontracts Short-termtemporarydifferences Capitalallowances Total 2018 £m Movement through other comprehensive income and equity Movement in income statement Other movements including foreign currency movements 1 – (266) – 23 (242) 666 (91) 68 (1) 642 93 – (8) – – 85 195 – (15) – 180 5 – 81 1 38 125 20 (39) (109) (1) (129) At 1 Jan 14 1 2,532 14 66 2,627 (1,748) (872) (2,041) (54) (4,715) At 31 Dec 113 1 2,339 15 127 2,595 (867) (1,002) (2,097) (56) (4,022) Oftheshort-termtemporarydifferencesof£2,339millionrelatingtodeferredtaxassets,£2,194millionrelatingtotheUSinsurance operationsisexpectedtoberecoveredinlinewiththerunoffofthein-forcebook,andtheremainingbalancesofthe£145millionare expectedtoberecoveredwithin10years. Thedeferredtaxbalancesat31December2018and2017ariseinthefollowingpartsoftheGroup: Asiaoperations USoperations UKandEurope Otheroperations Total Deferred tax assets Deferred tax liabilities 2018 £m 2017 £m 2018 £m 2017 £m 119 2,295 126 55 2,595 112 2,300 157 58 2,627 (1,257) (1,688) (1,061) (16) (4,022) (1,152) (1,845) (1,703) (15) (4,715) UnderIAS12,‘IncomeTaxes’,deferredtaxismeasuredatthetaxratesthatareexpectedtoapplytotheperiodwhentheassetisrealised ortheliabilitysettled,basedonthetaxrates(andlaws)thathavebeenenactedoraresubstantivelyenactedattheendofthereporting period. Deferredtaxassetsarerecognisedtotheextentthattheyareregardedasrecoverable,thatistotheextentthat,onthebasisofall availableevidence,itcanberegardedasmorelikelythannotthattherewillbesuitabletaxableprofitsfromwhichthefuturereversalof theunderlyingtemporarydifferencescanbededucted. www.prudential.co.uk AnnualReport2018 Prudential plc 283 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC8 Tax assets and liabilities continued C8.1 Deferred tax continued ThetaxationregimesapplicableacrosstheGroupoftenapplyseparaterulestotradingandcapitalprofitsandlosses.Thedistinction betweentemporarydifferencesthatarisefromitemsofeitheratradingorcapitalnaturemayaffecttherecognitionofdeferredtaxassets. Forthe2018resultsandfinancialpositionat31December2018thefollowingtaxbenefitshavenotbeenrecognised: Capitallosses Tradinglosses 31 Dec 2018 31 Dec 2017 Tax benefit £m Losses £bn Tax benefit £m Losses £bn 49 49 0.2 0.2 79 74 0.4 0.3 Oftheunrecognisedtradinglosses,lossesof£34millionwillexpirewithinthenext10years,theresthavenoexpirydate. SomeoftheGroup’sbusinessesarelocatedinjurisdictionsinwhichawithholdingtaxchargeisincurreduponthedistributionof earnings.Deferredtaxliabilitiesof£117million(2017:£120million)havenotbeenrecognisedinrespectofsuchwithholdingtaxes astheGroupisabletocontrolthetimingofthedistributionsanditisprobablethatthetimingdifferenceswillnotreverseinthe foreseeablefuture. C8.2 Current tax Ofthe£618million(31December2017:£613million)currenttaxrecoverable,themajorityisexpectedtoberecoveredinoneyear orless.Thecurrenttaxrecoverableincludes£112millioninrelationtothelitigationrelatingtothehistorictaxtreatmentofdividends receivedfromoverseasportfolioinvestmentsoflifeinsurancecompanies.ThePrudentialAssuranceCompanyLimited(PAC)was thetestcaseforthelitigation.InJuly2018,theUKSupremeCourtruledinPAC’sfavouronmostofthesubstantiveissues.PACand HMRevenue&Customs(HMRC)areworkingthroughthemechanicsofimplementingtheSupremeCourtdecision.PACexpectsto receivefullandfinalrepaymentfromHMRCin2019. Thecurrenttaxliabilityof£568million(31December2017:£537million)includes£149million(31December2017:£139million)of provisionsforuncertaintaxmatters.FurtherdetailisprovidedinnoteB4. C9 Defined benefit pension schemes (i) Background and summary economic and IAS 19 financial positions TheGroup’sbusinessesoperateanumberofpensionschemes.Thespecificfeaturesoftheseschemesvaryinaccordancewiththe regulationsofthecountryinwhichtheemployeesarelocated,althoughtheyare,ingeneral,fundedbytheGroupandbasedeitherona cashbalanceformulaoronyearsofserviceandsalaryearnedinthelastyearoryearsofemployment.Thelargestdefinedbenefitscheme istheprincipalUKscheme,namelythePrudentialStaffPensionScheme(PSPS).PSPSaccountsfor82percent(2017:82percent)ofthe underlyingschemeliabilitiesoftheGroup’sdefinedbenefitschemes. TheGroupalsooperatestwosmallerUKdefinedbenefitschemesinrespectofScottishAmicable(SASPS)andM&G(M&GGPS). Inaddition,therearetwosmalldefinedbenefitschemesinTaiwanwhichhavenegligibledeficits. UnderIAS19,‘EmployeeBenefits’andIFRIC14,‘IAS19–TheLimitonaDefinedBenefitAsset,MinimumFundingRequirements andtheirInteraction’,theGroupisonlyabletorecogniseasurplustotheextentthatitisabletoaccessthesurpluseitherthroughan unconditionalrightofrefundorthroughreducedfuturecontributionsrelatingtoongoingserviceofactivemembers.TheGrouphasno unconditionalrightofrefundtoanysurplusinPSPS.Accordingly,thePSPSsurplusrecognisedisrestrictedtothepresentvalueofthe economicbenefittotheGroupfromthedifferencebetweentheestimatedfutureongoingcontributionsandthefullfuturecostofservice fortheactivemembers.Incontrast,theGroupisabletoaccessthesurplusofSASPSandM&GGPS.Therefore,theamountsrecognised fortheseschemesaretheIAS19valuationamount(eitherasurplusordeficit). 284 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedTheGroupasset/liabilityinrespectofdefinedbenefitpensionschemesisasfollows: Underlyingeconomicsurplus (deficit) Less:unrecognisedsurplus Economicsurplus(deficit) (includinginvestmentin Prudentialinsurance policies) note (c) Attributableto: UKwith-profitsfund Shareholder-backed business Consolidationadjustment againstpolicyholder liabilitiesforinvestmentin Prudentialinsurance policies IAS19pensionasset(liability) ontheGroupstatementof financialposition note (d) 31 Dec 2018 £m 31 Dec 2017 £m PSPS note(a) SASPS note(b) M&GGPS Other schemes Total PSPS note(a) SASPS note(b) M&GGPS Other schemes Total 908 (677) (79) – 131 – (1) – 959 (677) 721 (485) (137) – 109 – (1) – 692 (485) 231 162 69 (79) 131 (32) – (47) 131 (1) – (1) 282 130 152 236 165 71 (137) 109 (55) (82) – 109 (1) – (1) 207 110 97 – – (225) – (225) – – (151) – (151) 231 (79) (94) (1) 57 236 (137) (42) (1) 56 Notes (a) (b) (c) NodeficitorotherfundingisrequiredforPSPS.Deficitfunding,whereapplicable,isapportionedintheratioof70/30betweentheUKwith-profitsfundandshareholder-backed businessfollowingdetailedconsiderationsin2005ofthesourcingofpreviouscontributions.Employercontributionsforongoingserviceofcurrentemployeesareapportionedin theratiorelevanttocurrentactivity. ThedeficitofSASPShasbeenallocated40percenttotheUKwith-profitsfundand60percenttotheshareholders’fundasat31December2018and2017. Theunderlyingpositiononaneconomicbasisreflectstheassets(includinginvestmentsinPrudentialinsurancepoliciesthatareoffsetagainstliabilitiestopolicyholdersonthe Groupconsolidation)andtheliabilitiesoftheschemes. (d) At31December2018,thePSPSpensionassetof£231million(31December2017:£236million)andtheotherschemes’pensionliabilitiesof£174million(31December2017: £180million)areincludedwithin‘Otherdebtors’and‘Provisions’respectivelyontheconsolidatedstatementoffinancialposition. Triennial actuarial valuations DefinedbenefitpensionschemesintheUKaregenerallyrequiredtobesubjecttofullactuarialvaluationseverythreeyearsinorderto assesstheappropriateleveloffundingforschemesinrelationtotheircommitments.Thesevaluationsincludeassessmentsofthelikely rateofreturnontheassetsheldwithintheseparatetrusteeadministeredfunds.TheactuarialvaluationdiffersfromtheIAS19 accountingbasisvaluationinanumberofrespects,includingthediscountrateassumptionwhereIAS19prescribesaratebasedon high-qualitycorporatebondswhileamore‘prudent’assumptionisusedfortheactuarialvaluation. TheinformationonthelatestcompletedactuarialvaluationfortheUKschemesisshowninthetablebelow: PSPS Lastcompletedactuarial 5April2017 valuationdate SASPS 31March2017 M&GGPS 31December2014* Valuationactuary,allFellows oftheInstituteandFaculty ofActuaries CGSinger TowersWatsonLimited JonathanSeed XafinityConsultingLimited PaulBelok AONHewittLimited Fundinglevelatthelast 105percent 75percent 99percent valuation Deficitfundingarrangement agreedwiththeTrustees basedonthelast completedvaluation Nodeficitorotherfunding required.Ongoing contributionsforactive membersareattheminimum levelrequiredunderthe schemerules(approximately £5millionperannum excludingexpenses) Deficitfundingof£26million perannumfrom1April2017 until31March2027,orearlier ifthescheme’sfundinglevel reaches100percentbefore thisdate.Thedeficitfunding willbereviewedeverythree yearsatsubsequentvaluations Nodeficitfundingrequiredfrom 1January2016 *ThetriennialvaluationforM&GGPSasat31December2017iscurrentlyinprogress. www.prudential.co.uk AnnualReport2018 Prudential plc 285 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC9 Defined benefit pension schemes continued (i) Background and summary economic and IAS 19 financial positions continued ForPSPS,themarketvalueoftheschemeassetsasatthe5April2017fundingvaluationwas£7,766million.Theactuarialassumptions usedindeterminingbenefitobligationsandthenetperiodicbenefitcostsforthepurposesofthe2017valuationwereasfollows: Rateofincreaseinsalaries Rateofinflation: RetailPricesIndex(RPI) ConsumerPricesIndex(CPI) Rateofincreaseofpensionsinpaymentforinflation: Guaranteed(maximum5%) Guaranteed(maximum2.5%) Discretionary Expectedreturnsonplanassets Mortality assumptions: ThetablesusedforPSPSpensionsinpaymentat5April2017were: % Nil 3.4 2.6 2.6 2.5 Nil 1.5 Base post-retirement mortality Formale(female)membersandmaledependants95percent(105percent)oftheSAPSS2PensionerAmountstable.Forfemale dependants89percentoftheSAPSS2DependantsAmountstable. Allowance for future improvements to post-retirement mortality Assumedimprovementsupto2017arebasedontheCMI2015Coreprojectionsmodelwitha1.5percentperannumlong-termtrend. From2018onwards,assumedimprovementsformales(females)arebasedontheCMI2015Coreprojectionsmodelwitha1.75percent perannum(1.5percentperannum)long-termtrend. Risks to which the defined benefit schemes expose the Group Responsibilityofmakinggoodofanydeficitthatmayariseintheschemeslieswiththeemployersoftheschemes,whicharesubsidiaries oftheGroup.Accordingly,thepensionschemesexposetheGrouptoanumberofrisksandthemostsignificantofwhichareinterestrate andinvestmentrisk,inflationriskandmortalityrisk. Corporate governance TheGroup’sUKpensionschemesareestablishedundertrustandaresubjecttoUKlegalrequirements;thisincludesbeingsubjectto regulationby‘ThePensionRegulator’inaccordancewiththePensionAct1995.Eachschemehasacorporatetrusteetowhichsome directorsareappointedbyGroupemployerswiththeremainingdirectorsnominatedbymembersinaccordancewithUKlegal requirements.ThetrusteeshavetheultimateresponsibilitytoensurethattheschemeismanagedinaccordancewiththeTrustDeed& Rules.Thetrusteesactinthebestinterestsoftheschemes’beneficiaries;thisincludestakingappropriateaccountofeachemployer’s legalobligationandfinancialabilitytosupporttheschemes,whensettinginvestmentstrategyandwhenagreeingfundingwiththe employers.Theemployers’contributioncommitmentsareformallyupdatedateachtriennialvaluation;betweenvaluationsfunding levelsandemployerstrengthcontinuetobemonitored,withtheTrusteesbeingabletobringforwardthenexttriennialvaluationifthey consideritappropriatetodoso. AlloftheGroup’sthreeUKdefinedbenefitpensionschemes(PSPS,SASPSandM&GGPS)arefinalsalaryschemes,whichareclosed tonewentrants. TheTrusteesofeachschemesetthegeneralinvestmentpolicyandspecifyanyrestrictionsontypesofinvestmentandthedegrees ofdivergencepermittedfromthebenchmark,butdelegatetheresponsibilityforselectionandrealisationofspecificinvestmentstothe InvestmentManagers.TheTrusteesconsultthePrincipalEmployer(egThePrudentialAssuranceCompanyLimitedforPSPS)onthe investmentprinciples,buttheultimateresponsibilityfortheinvestmentoftheassetsoftheschemelieswiththeTrustees. 286 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedTheTrusteesofeachoftheschemesmanagetheinvestmentstrategyoftheschemetoachieveanacceptablebalancebetween investingintheassetsthatmostcloselymatchtheexpectedbenefitpaymentsandassetsthatareexpectedtoachieveagreaterreturn inthehopeofreducingthecontributionsrequiredorprovidingadditionalbenefitstomembers. ForPSPS,asignificantportionoftheschemeassetsareinvestedinliabilitymatchingassetssuchasbondsandgilts,including index-linkedgilts,topartiallyhedgeagainstinflation.Inaddition,PSPShasmaintainedaportfolioofinterestrateandinflationswapsto matchmorecloselythedurationandinflationprofileofitsassetstoitsliabilities. TherisksarisingfromSASPSandM&GGPSaremanagedthroughadiversifiedmixofinvestments.Bothschemeshaveinvestedina mixofbothreturn-seekingassets,suchasequitiesandpropertyandmatchingassetsincludingleveragedliabilitydriveninvestment portfoliostoreflecttheliabilityprofileofthescheme. (ii) Assumptions Theactuarialassumptionsusedindeterminingbenefitobligationsandthenetperiodicbenefitcostsfortheyearsshownwereasfollows:  Discountrate* Rateofincreaseinsalaries Rateofinflation† Retailpricesindex(RPI) Consumerpricesindex(CPI) Rateofincreaseofpensionsinpaymentforinflation: PSPS: Guaranteed(maximum5%) Guaranteed(maximum2.5%) Discretionary Otherschemes 31 Dec 2018 % 31 Dec 2017 % 2.8 3.3 3.3 2.3 2.5 2.5 2.5 3.3 2.5 3.1 3.1 2.1 2.5 2.5 2.5 3.1 *Thediscountratehasbeendeterminedbyreferencetoan‘AA’corporatebondindex,adjustedwhereapplicabletoallowforthedifferenceindurationbetweentheindexandthepension liabilities. †Therateofinflationreflectsthelong-termassumptionforUKRPIorCPIdependingonthetrancheoftheschemes. Thecalculationsarebasedoncurrentmortalityestimateswithanallowancemadeforexpectedfutureimprovementsinmortality.This allowancereflectedtheCMI2015Coreprojectionsmodel(2017:CMI2014projectionsmodel,withscheme-specificcalibrations).In 2018,formemberspostretirementlong-termmortalityimprovementratesof1.75percentperannum(2017:1.75percentperannum) and1.50percentperannum(2017:1.25percentperannum)wereappliedformalesandfemales,respectively. www.prudential.co.uk AnnualReport2018 Prudential plc 287 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC9 Defined benefit pension schemes continued (iii) Estimated pension scheme surpluses and deficits ThissectionillustratesthefinancialpositionoftheGroup’sdefinedbenefitpensionschemesonaneconomicbasisandtheIAS19basis. Theunderlyingpensionpositiononaneconomicbasisreflectstheassets(includinginvestmentsinPrudentialpoliciesthatareoffset againstliabilitiestopolicyholdersontheGroupconsolidation)andtheliabilitiesoftheschemes.TheIAS19basisexcludesthe investmentsinPrudentialpolicies.At31December2018,M&GGPSheldinvestmentsinPrudentialinsurancepoliciesof£225million (31December2017:£151million). Movementsonthepensionschemesurplusdeterminedontheeconomicbasisareasfollows,withtheeffectoftheapplicationof IFRIC14beingshownseparately: All schemes Underlying position (without the effect of IFRIC 14) Surplus(deficit) Less:amountattributabletoUKwith-profitsfund Shareholders’share: Grossoftaxsurplus(deficit) Relatedtax Netofshareholders’tax Application of IFRIC 14 for the derecognition of PSPS surplus Derecognitionofsurplus Less:amountattributabletoUKwith-profitsfund Shareholders’share: Grossoftax Relatedtax Netofshareholders’tax With the effect of IFRIC 14 Surplus(deficit) Less:amountattributabletoUKwith-profitsfund Shareholders’share: Grossoftaxsurplus(deficit) Relatedtax Netofshareholders’tax 2018 £m Surplus (deficit) in schemes at 1 Jan 2018 (Charge) credit to income statement Actuarial gains and losses in other comprehensive income Contributions paid Surplus (deficit) in schemes at 31 Dec 2018 692 (473) 219 (42) 177 (485) 363 (122) 23 (99) 207 (110) 97 (19) 78 (88) 38 (50) 10 (40) (13) 8 (5) 1 (4) (101) 46 (55) 11 (44) 303 (178) 125 (24) 101 (179) 132 (47) 9 (38) 124 (46) 78 (15) 63 52 (20) 32 (6) 26 – – – – – 52 (20) 32 (6) 26 959 (633) 326 (62) 264 (677) 503 (174) 33 (141) 282 (130) 152 (29) 123 Underlying investments of the schemes Onthe‘economicbasis’,afterincludingtheunderlyingassetsrepresentedbytheinvestmentsinPrudentialinsurancepoliciesasscheme assets,theplans’assetscomprisethefollowinginvestments: Equities UK Overseas Bonds* Government Corporate Asset-backedsecurities Derivatives Properties Otherassets Totalvalueofassets† 31 Dec 2018 31 Dec 2017 PSPS £m 8 204 4,596 1,586 263 103 143 172 7,075 Other schemes £m 6 53 538 454 12 4 143 198 1,408 Total £m 14 257 5,134 2,040 275 107 286 370 8,483 PSPS £m 9 226 5,040 1,491 164 188 140 216 7,474 Other schemes £m 67 272 655 248 – (6) 130 77 1,443 Total £m 76 498 5,695 1,739 164 182 270 293 8,917 % – 3 61 24 3 1 3 5 100 % 1 6 63 20 2 2 3 3 100 *87percentofthebondsareinvestmentgrade(2017:89percent). †94percentofthetotalvalueoftheschemeassetsarederivedfromquotedpricesinanactivemarket(31December2017:96percent).NoneoftheschemeassetsincludedsharesinPrudentialplc orpropertyoccupiedbythePrudentialGroup.TheIAS19basisplanassetsat31December2018of£8,258million(31December2017:£8,766million)isdifferentfromtheeconomicbasis planassetsof£8,483million(31December2017:£8,917million)asshownaboveduetotheexclusionofinvestmentinPrudentialinsurancepoliciesbyM&GGPSasdescribedabove. 288 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedThemovementsintheIAS19pensionschemes’surplusanddeficitbetweenschemeassetsandliabilitiesasconsolidatedinthefinancial statementswere: Attributable to policyholders and shareholders Present value of benefit obligations note(a) Net surplus (deficit) (without the effect of IFRIC 14) Effect of IFRIC 14 for derecognition of PSPS surplus Economic basis net surplus (deficit) Other adjustments including for investments in Prudential insurance policies note(b) IAS 19 basis net surplus (deficit) 2018 £m Netsurplus(deficit),beginningofyear GMPequalisationprovision note (e) Currentservicecost Netinterestonnetdefinedbenefit liability(asset) Administrationexpenses Benefitpayments Employers’contributions note (c) Employees’contributions Actuarialgainsandlosses note (d) TransferintoinvestmentinPrudential insurancepolicies Plan assets 8,917 – – 217 (8) (475) 52 1 (221) – (8,225) (53) (44) (200) – 475 – (1) 524 – Netsurplus(deficit),endofyear 8,483 (7,524) 2017 £m Netsurplus(deficit),beginningofyear Currentservicecost Netinterestonnetdefinedbenefit liability(asset) Administrationexpenses Benefitpayments Employers’contributions note (c) Employees’contributions Actuarialgainsandlosses note (d) TransferintoinvestmentinPrudential insurancepolicies Netsurplus(deficit),endofyear 9,006 – (8,443) (46) 228 (8) (479) 50 1 119 – 8,917 (214) – 479 – (1) – – (8,225) 692 (53) (44) 17 (8) – 52 – 303 – 959 563 (46) 14 (8) – 50 – 119 – 692 (485) – – (13) – – – – (179) – (677) (558) – (14) – – – – 87 – (485) 207 (53) (44) 4 (8) – 52 – 124 – 282 5 (46) – (8) – 50 – 206 – 207 (151) – – (4) – – – – 10 (80) (225) (134) – (3) – – – – (6) (8) (151) 56 (53) (44) – (8) – 52 – 134 (80) 57 (129) (46) (3) (8) – 50 – 200 (8) 56 www.prudential.co.uk AnnualReport2018 Prudential plc 289 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC9 Defined benefit pension schemes continued (iii) Estimated pension scheme surpluses and deficits continued Notes (a) Maturity profile of the benefit obligations   Theweightedaveragedurationofthebenefitobligationsoftheschemesis18.4years(2017:18.6years).  Thefollowingtableprovidesanexpectedmaturityanalysisofthebenefitobligations: All schemes £m 31 Dec 2018 31Dec2017 1 year or less 257 255 After 1 year to 5 years After 5 years to 10 years After 10 years to 15 years After 15 years to 20 years 1,142 1,108 1,593 1,589 1,641 1,667 1,631 1,661 Over 20 years 7,426 7,889 Total 13,690 14,169 (b) (c) (d) TheadjustmentsforinvestmentsinPrudentialinsurancepoliciesareconsolidationadjustmentsforintra-groupassetsandliabilitieswithnoimpacttoadjustedIFRSoperatingprofit basedonlonger-terminvestmentreturns. TotalemployercontributionsexpectedtobepaidintotheGroupdefinedbenefitschemesfortheyearending31December2019amountto£52million(2018:£50million). Theactuarialgainsandlossesattributabletopolicyholdersandshareholdersasshowninthetableaboveareanalysedasfollows: 2018 £m 2017 £m Actuarialgainsandlosses Returnontheschemeassetslessamountincludedininterestincome Gains(losses)onchangesindemographicassumptions Gains(losses)onchangesinfinancialassumptions Experiencegainsonschemeliabilities EffectofderecognitionofPSPSsurplus ConsolidationadjustmentforinvestmentsinPrudentialinsurancepoliciesandotheradjustments (221) 168 330 26 303 (179) 10 134 119 (10) (101) 111 119 87 (6) 200 (e)  InOctober2018,theHighCourtruledthatpensionschemesarerequiredtoequalisebenefitsfortheeffectofguaranteedminimumpensions(GMPs).GMPsareaminimumbenefit thatschemesthatwerecontracted-outonasalary-relatedbasisbetween1978and1997arerequiredtoprovide.  InlightofthisCourtruling,at31December2018,theGrouphasrecognisedanestimatedallowanceforGMPequalisationwithintheIAS19valuationforallthethreeUK schemes(£31millionforPSPS,£17millionforSASPSand£5millionforM&GGPS).ThesecostsareallocatedbetweentheUKwith-profitsfundandtheshareholders’fundonthe basisof70:30forPSPS,40:60forSASPSandwithM&GGPSbeingwhollyattributabletotheshareholders’fund.Theimpactonshareholdersprofitbeforetaxis£24million(before takingintoaccountanychargetoPSPSsurplusrestriction)andonshareholders’equityposttaxis£12million. (iv) Sensitivity of the pension scheme liabilities to key variables Thesensitivityinformationbelowisbasedonthecoreschemeliabilitiesandassumptionsatthebalancesheetdate.Thesensitivitiesare calculatedbasedonachangeinoneassumptionwithallotherassumptionsbeingheldconstant.Assuch,interdependenciesbetween theassumptionsareexcluded.Theimpactoftherateofinflationassumptionsensitivityincludestheimpactofinflationontherateof increaseinsalariesandrateofincreaseofpensionsinpayment. Thesensitivitiesoftheunderlyingpensionschemeliabilitiesasshownbelowdonotdirectlyequatetotheimpactontheprofitorloss attributabletoshareholdersorshareholders’equityduetotheeffectoftheapplicationofIFRIC14onPSPSandtheallocationofashare oftheinterestinthefinancialpositionofPSPSandSASPStotheUKwith-profitsfundasdescribedabove. . Assumption applied Impact of sensitivity on scheme liabilities on IAS 19 basis Discountrate 2018 2.8% 2017 Sensitivity change in assumption 2018 2017 2.5% Decreaseby0.2% Increaseinschemeliabilitiesby: Discountrate 2.8% 2.5% Increaseby0.2% Decreaseinschemeliabilitiesby: PSPS Otherschemes Rateofinflation 3.3% 2.3% 3.1% RPI:Decreaseby0.2% 2.1% CPI:Decreaseby0.2%with consequentreductionin salaryincreases PSPS Otherschemes Decreaseinschemeliabilitiesby: PSPS Otherschemes 3.5% 5.0% 3.3% 4.7% 0.6% 3.9% 3.5% 5.4% 3.4% 4.9% 0.6% 3.9% Mortalityrate Increaselifeexpectancy Increaseinschemeliabilitiesby: by1year PSPS Otherschemes 3.9% 3.9% 4.0% 3.8% 290 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continued C10 Share capital, share premium and own shares Number of ordinary shares Issued shares of 5p each fully paid At 1 January Sharesissuedundershare-basedschemes 2,587,175,445 5,868,964 At 31 December 2,593,044,409 2018 Share capital £m 129 1 130 Share premium £m Number of ordinary shares 1,948 2,581,061,573 6,113,872 16 1,964 2,587,175,445 2017 Share capital £m 129 – 129 Share premium £m 1,927 21 1,948 Amountsrecordedinsharecapitalrepresentthenominalvalueofthesharesissued.Thedifferencebetweentheproceedsreceivedon issueofshares,netofissuecosts,andthenominalvalueofsharesissuediscreditedtothesharepremiumaccount. At31December2018,therewereoptionsoutstandingundersaveasyouearnschemestosubscribeforsharesasfollows: 31 Dec 2018 31Dec2017 Number of shares to subscribe for 4,885,804 6,448,853 Share price range from 901p 629p to Exercisable by year 1,455p 1,455p 2024 2023 Transactions by Prudential plc and its subsidiaries in Prudential plc shares TheGroupbuysandsellsPrudentialplcshares(‘ownshares’)eitherinrelationtoitsemployeeshareschemesorviatransactions undertakenbyauthorisedinvestmentfundsthattheGroupisdeemedtocontrol.Thecostofownsharesof£170millionasat 31December2018(31December2017:£250million)isdeductedfromretainedearnings.TheCompanyhasestablishedtruststo facilitatethedeliveryofsharesunderemployeeincentiveplans.At31December2018,9.6million(31December2017: 11.4million)Prudentialplcshareswithamarketvalueof£135million(31December2017:£218million)wereheldinsuchtrustsallof whichareforemployeeincentiveplans.Themaximumnumberofsharesheldduring2018was14.9millionwhichwasinMarch2018. TheCompanypurchasedthefollowingnumberofsharesinrespectofemployeeincentiveplans.Thesharespurchasedeachmonth areasfollows: January February March April May June July August September October November December Total 2018 share price 2017 share price Number of shares 51,555 55,765 55,623 1,664,334 63,334 181,995 55,888 60,384 82,612 148,209 67,162 73,744 2,560,605 Low 19.18 17.91 18.25 16.67 18.91 18.21 17.68 18.04 16.95 15.62 15.95 13.99 High 19.40 18.10 18.54 17.95 19.38 18.65 17.86 18.10 16.98 16.84 15.96 14.30 Cost Number of shares 996,536 1,004,362 1,025,238 29,113,556 1,216,136 3,335,725 993,779 1,090,283 1,400,868 2,477,127 1,071,633 1,045,278 62,388 65,706 70,139 3,090,167 55,744 182,780 51,984 55,857 51,226 136,563 53,951 53,519 44,770,521 3,930,024 Low 15.83 15.70 16.40 16.58 17.50 17.52 17.72 18.30 17.45 17.99 18.38 18.26 High 16.02 16.09 16.54 16.80 17.62 18.00 17.93 18.73 17.97 18.22 18.40 18.47 Cost 989,583 1,052,657 1,159,950 51,369,760 979,645 3,269,447 927,452 1,025,802 912,151 2,483,879 992,123 986,000 66,148,449 TheGrouphasconsolidatedanumberofauthorisedinvestmentfundswhereitisdeemedtocontrolthesefundsunderIFRS.Someof thesefundsholdsharesinPrudentialplc.Thetotalnumberofsharesheldbythesefundsat31December2018was3.0million (31December2017:6.4million)andthecostofacquiringthesesharesof£20million(2017:£71million)isincludedinthecostofown shares.Themarketvalueofthesesharesasat31December2018was£42million(31December2017:£121million).During2018,these fundsmadenetdisposalsof3,368,506Prudentialshares(2017:acquisitionsof372,029)foranetdecreaseof£50.5milliontobookcost (2017:netincreaseof£9.4million). AllsharetransactionsweremadeonanexchangeotherthantheStockExchangeofHongKong. OtherthansetoutabovetheGroupdidnotpurchase,sellorredeemanyPrudentialplclistedsecuritiesduring2018or2017. www.prudential.co.uk AnnualReport2018 Prudential plc 291 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC11 Provisions ProvisioninrespectofdefinedbenefitpensionschemesC9 Otherprovisions note Total provisions Note Analysisofotherprovisions: At 1 January Chargedtoincomestatement: Additionalprovisions Unusedamountsreleased Usedduringtheyear Exchangedifferences Total at 31 December 31 Dec 2018 £m 31 Dec 2017 £m 174 904 1,078 180 943 1,123 2018 £m 2017 £m 943 229 (18) (262) 12 904 659 542 (9) (239) (10) 943 Otherprovisionscomprisestaffbenefitsprovisionsof£409million(31December2017:£453million)thataregenerallyexpectedtobe paidoutwithinthenextthreeyears,otherprovisionsof£171million(31December2017:£121million)andaprovisionforreviewofpast annuitysalesafterutilisationduringtheyearof£324million(31December2017:£369million).PrudentialhasagreedwiththeFinancial ConductAuthority(FCA)toreviewannuitiessoldwithoutadviceafter1July2008toitscontract-baseddefinedcontributionpension customers.Thereviewisexaminingwhethercustomersweregivensufficientinformationabouttheirpotentialeligibilitytopurchasean enhancedannuity,eitherfromPrudentialoranotherpensionprovider.Agrossprovisionof£400million,beforecostsincurred,was establishedat31December2017tocoverthecostsofundertakingthereviewandanyrelatedredressandfollowingareassessment,no changehasbeenmadein2018.Themajorityoftheprovisionwillbeutilisedin2019.Theultimateamountthatwillbeexpendedbythe Grouponthereviewwillremainuncertainuntiltheprojectiscompleted.Ifthepopulationsubjecttoredressincreasedordecreasedby 10percent,thentheprovisionwouldbeexpectedtoincreaseordecreasebycirca7percentaccordingly.Additionally,in2018,the Groupagreedwithitsprofessionalindemnityinsurersthattheywillmeet£166millionoftheGroup’sclaimscosts,whichwillbepaidas theGroupincurscosts/redress.ThishasbeenrecognisedontheGroup’sbalancesheetwithin‘Otherdebtors’at31December2018. C12 Capital C12.1 Group objectives, policies and processes for managing capital (i) Capital measure TheGroupmanagesitsGroupSolvencyIIownfundsasitsmeasureofcapital.At31December2018estimatedGroupSolvencyIIown fundsare£30.2billion(31December2017:£26.4billion). (ii) External capital requirements SolvencyIIistheGroup’sconsolidatedcapitalregime.SolvencyIIisarisk-basedsolvencyframeworkrequiredundertheEuropean SolvencyIIDirectiveasimplementedbythePrudentialRegulatoryAuthorityintheUK.TheSolvencyIIsurplusrepresentsthe aggregatedcapitalheldbytheGrouplessSolvencyCapitalRequirements. (iii) Meeting of capital management objectives TheGroupSolvencyCapitalRequirementhasbeenmetduring2018. AswellasholdingsufficientcapitaltomeetSolvencyIIrequirementsatGrouplevel,theGroupalsocloselymanagesthecashitholds withinitscentralholdingcompaniessothatitcan: — Maintainflexibility,fundnewopportunitiesandabsorbshockevents; — Funddividends;and — Covercentralcostsanddebtpayments. MoredetailsonholdingcompanycashflowsandbalancesaregiveninsectionII(a)oftheAdditionalunauditedfinancialinformation. WhiletheGroupataconsolidatedlevelissubjecttotheSolvencyIIrequirements,atabusinessunitlevelcapitalisdefinedbylocal capitalregulationsandlocalbusinessneeds. EachoftheGroup’slong-termbusinessoperationsiscapitalisedtoasufficientlystronglevelforitsindividualcircumstances. TheGroupmanagesitsassets,liabilitiesandcapitallocally,inaccordancewithlocalregulatoryrequirementsandreflectingthe differenttypesofliabilitiesineachbusinessunit.AsaresultofthediversityofproductsofferedbyPrudentialandthedifferentregulatory regimesunderwhichitoperates,theGroupemploysdifferingmethodsofasset/liabilityandcapitalmanagement,dependingonthe businessconcerned. StochasticmodellingofassetsandliabilitiesisundertakenintheUK,USandAsiatoassesstheeconomiccapitalrequirements. Astochasticapproachmodelstheinter-relationshipbetweenassetandliabilitymovements,takingintoaccountassetcorrelation, managementactionsandpolicyholderbehaviourunderalargenumberofalternativeeconomicscenarios. 292 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continued Inaddition,reserveadequacytestingunderarangeofscenariosanddynamicsolvencytestingiscarriedout,includingundercertain scenariosmandatedbytheUK,USandAsiaregulators. Thesensitivityofliabilitiesandothercomponentsoftotalcapitalvarydependinguponthetypeofbusinessconcernedandthis conditionstheapproachtoasset/liabilitymanagement. (iv) Post demerger InAugust2018,theGroupannouncedthattheHongKongInsuranceAuthoritywouldbecomeitsleadregulatoruponsuccessful completionofthedemerger.TheEuropeanSolvencyIIregimewillnolongerbeapplicabletoPrudentialplcgroupanditisproactively engagingwiththeHongKongInsuranceAuthorityonthesupervisoryframeworkthatwillapplytotheGroupafterthedemerger. C12.2 Local capital regulations (i) Asia insurance operations TheestimatedavailablecapitalpositionforAsialifeinsuranceoperationsexcludingwith-profitsfundswithreconciliationto shareholdersequityisshownbelow: IFRS shareholders’ equity Adjustments to local regulatory basis Removedeferredacquisitioncosts,goodwillandotherintangibles Otheradjustments Totaladjustments Total available capital resources of life assurance businesses on a local regulatory basis excluding with-profits funds note 31 Dec 2018 £m 5,868 (1,850) 631 (1,219) 31 Dec 2017 £m 5,525 (1,515) 306 (1,209) 4,649 4,316 Note Theavailablecapitalresourcesonalocalregulatorybasisasat31December2018excludesthewith-profitsbusinessofHongKong,SingaporeandMalaysiaof£11,524million (31December2017:£10,253million). Thecapitalrequirementsofsignificantoperationsare: China Arisk-basedcapital,riskmanagementandgovernanceframework,knownastheChinaRiskOrientedSolvencySystem(C-ROSS), appliesinChina.UnderC-ROSS,insurersarerequiredtomaintainacoresolvencyratio(corecapitaloverminimumcapital)anda comprehensivesolvencyratio(actualcapitaloverminimumcapital)ofnotlowerthan50percentand100percent,respectively.The actualcapitalisthedifferencebetweentheadmittedassetsandadmittedliabilities. Hong Kong Thecapitalrequirementvariesbyunderlyingriskanddurationofliabilities,butisgenerallydeterminedasapercentageofmathematical reservesandcapitalatrisk.Mathematicalreservesarebasedonabestestimatebasiswithprudentmarginsforadversedeviations, discountedatavaluationinterestratebasedonablendbetweentherisk-adjustedportfolioyieldandthereinvestmentrate. Indonesia Solvencycapitalisdeterminedusingarisk-basedcapitalapproach.InsurancecompaniesinIndonesiaareexpectedtomaintainthelevel ofnetassetsabove100percentofsolvencycapital. Malaysia Arisk-basedcapitalframeworkappliesinMalaysia.Thelocalregulator,BankNegaraMalaysia(BNM),hassetaSupervisoryTargetCapital Levelof130percentbelowwhichsupervisoryactionsofincreasingintensitywillbetaken.Eachinsurerisalsorequiredtosetitsown IndividualTargetCapitalLeveltoreflectitsownriskprofileandthisisexpectedtobehigherthantheSupervisoryTargetCapitalLevel. MarketliberalisationmeasureswereintroducedbyBNMinApril2009,whichincreasesthelimitfrom49percentto70percenton foreignequityownershipforinsurancecompaniesandTakafuloperatorsinMalaysia.Ahigherforeignequitylimitbeyond70percentfor insurancecompanieswillbeconsideredbyBNMonacasebycasebasisforcompanieswhosupportexpansionofinsuranceprovisionto themostvulnerableinMalaysiansociety. Singapore Arisk-basedcapitalframeworkappliesinSingapore.AregisteredinsurerincorporatedinSingaporeisrequiredatalltimestomaintaina minimumlevelofpaid-upordinarysharecapitalandtoensurethatitsfinancialresourcesarenotlessthanthegreaterof(i)thetotalrisk requirementarisingfromtheassetsandliabilitiesoftheinsurer,calculatedinaccordancewiththeSingaporeInsuranceAct;or(ii)a minimumamountofS$5million(Singaporedollars).Theregulatoralsohastheauthoritytodirectthattheinsurersatisfyadditionalcapital adequacyrequirementsinadditiontothosesetforthundertheSingaporeInsuranceActifitconsiderssuchadditionalrequirements appropriate. www.prudential.co.uk AnnualReport2018 Prudential plc 293 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC12 Capital continued C12.2 Local capital regulations continued (ii) US insurance operations TheestimatedcapitalpositionforJacksonwithreconciliationtoshareholders’equityisshownbelow: IFRS shareholders’ equity Adjustments to regulatory basis Removedeferredacquisitioncosts Jacksonsurplusnotes InvestmentandpolicyholderliabilitiesvaluationdifferencesbetweenIFRSandregulatorybasisforJackson Otheradjustments* Totaladjustments Total available capital resources of life assurance businesses on a local regulatory basis 31 Dec 2018 £m 5,584 31 Dec 2017 £m 5,013 (8,727) 196 7,217 63 (1,251) 4,333 (8,197) 184 5,325 818 (1,870) 3,143 *OtheradjustmentsincludetheremovalofentitiesrecordedasUSinsuranceoperationsintheIFRSstatementswhichfalloutsidethescopeofJacksonNationalLifeInsuranceCompany. TheregulatoryframeworkforJacksonisgovernedbytherequirementsoftheUSNAICapprovedRisk-BasedCapitalstandards.Under theserequirementslifeinsurancecompaniesreportusingaformula-basedcapitalstandardwhichincludescomponentscalculatedby applyingafter-taxfactorstovariousasset,premiumandreserveitemsandaseparatemodel-basedcomponentformarketriskassociated primarilywithvariableannuityproducts.Theafter-taxfactorswereadjustedtoreflecttheimpactofUSTaxReformduring2018. JacksonhadapermittedpracticeineffectasgrantedbythelocalregulatorallowingJacksontocarrycertaininterestrateswapsat bookvalue,asifstatutoryhedgeaccountingwereinplace,insteadofatfairvalueaswouldhavebeenotherwiserequired.Jacksonis requiredtodemonstratetheeffectivenessofitsinterestrateswapprogrammepursuanttotheMichiganInsuranceCode.Thetotal effectofthispermittedpractice,netoftax,wastodecreasestatutorysurplusby£129million(31December2017:£355million). UndertheequivalenceprovisionsofSolvencyII,JacksonisincorporatedintotheGroup’sSolvencyIIpositionatalevelequal toavailablecapitalinexcessof100percentoftheUSlocalminimumrisk-basedcapitalrequirementlevelatwhichcorrective actioncommences. (iii) UK and Europe insurance operations InsuranceoperationsintheUKandEuropearesubjecttoSolvencyIIcapitalrequirementsonanindividualbasis.Thesehavebeenmet during2018. (iv) Asset management operations – regulatory and other surplus CertainassetmanagementsubsidiariesoftheGrouparesubjecttolocalregulatoryrequirements.Themovementintheyearofthe estimatedsurplusregulatorycapitalpositionofthosesubsidiaries,combinedwiththemovementintheIFRSbasisshareholders’funds forunregulatedassetmanagementoperations,isasfollows: Regulatory and other surplus Beginningofyear Gainsduringtheyear Movementincapitalrequirement Capitalinjection Distributionsmadetotheparentcompany Exchangeandothermovements Endofyear  Asset management operations 2018 £m US Eastspring Investments 2017 £m Total Total M&GPrudential 419 364 (10) 88 (197) – 664 235 23 – – (97) (121) 40 222 138 5 13 (104) 20 294 876 525 (5) 101 (398) (101) 998 814 586 (73) 6 (433) (24) 876 294 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedC12.3 Transferability of available capital IntheUK,PACisrequiredtomeettheSolvencyIIcapitalrequirementsasacompanyasawhole,iecoveringbothitsring-fenced with-profitsfundsandnon-profitfunds.Further,thesurplusofthewith-profitsfundsisring-fencedfromtheshareholderbalancesheet withrestrictionsastoitsdistribution.Distributionsfromthewith-profitsfundstoshareholderscontinuetoreflecttheshareholders’ one-ninthshareofthecostofdeclaredpolicyholders’bonuses. ForJackson,capitalretentionismaintainedatalevelconsistentwithanappropriateratingbyStandard&Poor’s.CurrentlyJacksonis ratedAA.Jacksoncanpaydividendsonitscapitalstockonlyoutofearnedsurplusunlesspriorregulatoryapprovalisobtained. Furthermore,dividendsthatexceedthegreaterofstatutorynetgainfromoperationslessnetrealisedinvestmentslossesfortheprior yearor10percentofJackson’sprioryearendstatutorysurplus,excludinganyincreasearisingfromtheapplicationofpermitted practices,requirepriorregulatoryapproval. ForAsiasubsidiaries,theamountsretainedwithinthecompaniesareatlevelsthatprovideanappropriatelevelofcapitalstrengthin excessofthelocalregulatoryminimum.ThebusinessesinAsiamay,ingeneral,remitdividendstoUKparententities,providedthe statutoryinsurancefundmeetsthelocalregulatorysolvencyrequirements.Forwith-profitsfunds,theexcessofassetsoverliabilitiesis retainedwithinthefunds,withdistributiontoshareholderstiedtotheshareholders’shareofdeclaredbonuses. Availablecapitalofthenon-insurancebusinessunitsistransferableaftertakingaccountofanappropriatelevelofoperatingcapital, basedonlocalregulatorysolvencyrequirements,overandabovebaseliabilities. C13 Property, plant and equipment Property,plantandequipmentcompriseGroupoccupiedpropertiesandtangibleassets.Areconciliationofthecarryingamountofthese itemsfromthebeginningoftheyeartotheendoftheyearisasfollows: At 1 January Cost Accumulateddepreciation Net book amount Year ended 31 December Openingnetbookamount Exchangedifferences Depreciationandimpairmentcharge Additions Arisingonacquisitionsofsubsidiaries Disposalsandtransfers Closing net book amount At 31 December Cost Accumulateddepreciation Net book amount 367 (72) 295 295 13 (10) 35 4 (8) 329 412 (83) 329 Group occupied property 2018 £m Tangible assets Total 1,408 (619) 789 789 23 (137) 289 522 (77) 1,041 (547) 494 494 10 (127) 254 518 (69) 1,080 1,409 1,641 (561) 1,080 2,053 (644) 1,409 Group occupied property 2017 £m Tangible assets 439 (88) 351 351 (8) (22) 17 – (43) 295 367 (72) 295 1,077 (685) 392 392 (14) (94) 117 178 (85) 494 1,041 (547) 494 Total 1,516 (773) 743 743 (22) (116) 134 178 (128) 789 1,408 (619) 789 Tangible assets Ofthe£1,080million(31December2017:£494million)oftangibleassets,£856million(31December2017:£360million)wereheldby theGroup’swith-profitsbusinesses,primarilybytheconsolidatedsubsidiariesforventurefundandotherinvestmentpurposesoftheUK with-profitsfund. Capital expenditure: property, plant and equipment by segment Thecapitalexpenditureof£254million(2017:£117million)aroseasfollows:£52million(2017:£55million)inAsia,£14million(2017: £19million)inUSand£187million(2017:£41million)inUKandEuropewiththeremainingbalanceof£1million(2017:£2million)arising fromunallocatedcorporateexpenditure. www.prudential.co.uk AnnualReport2018 Prudential plc 295 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationC14 Investment properties InvestmentpropertiesprincipallyrelatetotheUKwith-profitsfundandarecarriedatfairvalue.Areconciliationofthecarryingamountof investmentpropertiesatthebeginningandendoftheyearissetoutbelow: At 1 January Additions: Resultingfrompropertyacquisitions Resultingfromexpenditurecapitalised Disposals Netgainfromfairvalueadjustments Netforeignexchangedifferences At 31 December 2018 £m 2017 £m 16,497 14,646 1,326 183 (178) 149 (52) 2,009 39 (591) 415 (21) 17,925 16,497 The2018incomestatementincludesrentalincomefrominvestmentpropertiesof£927million(2017:£876million)anddirectoperating expensesincludingrepairsandmaintenancearisingfromthesepropertiesof£56million(2017:£82million). Investmentpropertiesof£5,825million(31December2017:£5,689million)areheldunderfinanceleases.Thepresentvalueof minimumleasepaymentsundertheseleasesis£42million(31December2017:£43million)and76percent(31December2017: 73percent)ofleasepaymentsaredueinoverfiveyears. TheGroup’spolicyistoletinvestmentpropertiestotenantsthroughoperatingleases.Minimumfuturerentalstobereceivedon non-cancellableoperatingleasesoftheGroup’sfreeholdinvestmentpropertiesarereceivableinthefollowingperiods: Lessthan1year 1to5years Over5years Total 2018 £m 2017 £m 314 1,077 2,242 3,633 322 1,073 2,286 3,681 Thetotalminimumfuturerentalstobereceivedonnon-cancellablesub-leasesfortheGroup’sinvestmentpropertiesheldunderfinance leasesat31December2018are£1,596million(31December2017:£1,527million). 296 Prudential plc AnnualReport2018 www.prudential.co.uk C Balance sheet notes continuedD Other notes D1 Corporate transactions D1.1 Gains/(losses) on disposal of businesses and corporate transactions ‘(Loss)gainondisposalofbusinessesandcorporatetransactions’comprisesthefollowing: LossarisingonreinsuranceofpartofUKshareholder-backedannuityportfolio note (i) Othertransactions note (ii) 2018 £m 2017 £m (508) (80) (588) – 223 223 Notes (i)      Loss arising on reinsurance of part of UK shareholder-backed annuity portfolio InMarch2018,M&GPrudentialannouncedthereinsuranceof£12.0billion(asat31December2017)ofitsshareholder-backedannuityportfoliotoRothesayLife.Undertheterms oftheagreement,M&GPrudentialhasreinsuredtheliabilitiestoRothesayLife,whichisexpectedtobefollowedbyacourtsanctionedlegaltransfer,underPartVIIoftheFinancial ServicesandMarketsAct2000(PartVII),ofmostoftheportfoliotoRothesayLifeby30June2019. Thereinsuranceagreementbecameeffectiveon14March2018.Areinsurancepremiumof£12,149millionhasbeenrecognisedwithin‘Outwardreinsurancepremiums’inthe incomestatementandsettledviathetransferoffinancialinvestmentsandotherassetstoRothesayLife.Afterallowingfortherecognitionofareinsuranceassetandassociated changestopolicyholderliabilities,alossof£(508)millionwasrecognisedin2018inrelationtothetransaction. ThereinsuredannuitybusinessthatwillbetransferredoncethePartVIIprocessiscompletehasbeenclassifiedasheldforsaleintheseconsolidatedfinancialstatementsin accordancewithIFRS5,‘Non-currentassetsheldforsaleanddiscontinuedoperations’. TheassetsandliabilitiesoftheM&GPrudentialannuitybusinessclassifiedasheldforsaleonthestatementoffinancialpositionareasfollows: Assets Reinsurer’sshareofinsurancecontractliabilities Otherassets(includingcashandcashequivalents) Assets held for sale Liabilities Policyholderliabilities Otherliabilities Liabilities held for sale 31 Dec 2018 £m 10,502 66 10,568 10,502 66 10,568 (ii) Other transactions  Othertransactioncostsof£80millionincurredbytheGroupin2018primarilyrelatetoadditionalcostsincurredinexitingfromtheNPHbroker-dealerbusinessandcostsrelatedto preparationforthepreviouslyannouncedintentiontodemergeM&GPrudentialfromPrudentialplc,resultingintwoseparatelylistedentities. In2017,theGroupcompleteditsdisposalofitsKorealifebusiness,realisingagainof£61millionprincipallyasaresultofrecyclingfromothercomprehensiveincomecumulative exchangegainsofthisbusiness.On15August2017,theGroup,throughitssubsidiaryNationalPlanningHoldings,Inc.(NPH)solditsUSindependentbroker-dealernetworktoLPL FinancialLLCwhichrealisedagainof£162millionin2017.Togetherthesetwotransactionsgeneratedagainondisposalofbusinessesandcorporatetransactionsof£223million. www.prudential.co.uk AnnualReport2018 Prudential plc 297 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationD1 Corporate transactions continued D1.2 Acquisition of TMB Asset Management Co., Ltd. in Thailand InSeptember2018,theGroupcompleteditsinitialacquisitionof65percentofTMBAssetManagementCo.,Ltd.(TMBAM),anasset managementcompanyinThailand,fromTMBBankPublicLimited(TMB)for£197million. Thetermsofthesaleagreementincludeacalloptionexercisable(bytheGroup)afterthreeyearsandaputoptionexercisable(by TMB)afterfouryearswhich,ifexercised,triggersthepurchaseoftheremaining35percentofthebusiness.Theputoption,inlinewith IFRS,hasbeenrecognisedasafinancialliabilityandareductioninshareholders’equityof£106millionasoftheacquisitiondate,being thediscountedexpectedconsiderationpayablefortheremaining35percent(£109millionasof31December2018). Thefairvalueoftheacquiredassets,assumedliabilitiesandresultinggoodwillareshowninthetablebelow: Assets Intangibleassets Otherassets Cashandcashequivalents Total assets Otherliabilities Non-controllinginterests Net assets acquired and liabilities assumed Goodwillarisingonacquisition* Purchase consideration 31 Dec 2018 £m 5 26 2 33 (10) (7) 16 181 197 *Thegoodwillonacquisitionof£181million(retranslatedto£186millionat31December2018)ismainlyattributabletotheexpectedbenefitsfromnewcustomersandsynergies.Referto noteC5.1forchangestothecarryingamountofgoodwillduringtheyear. TheacquisitionofTMBAMcontributed£18milliontorevenueand£5milliontoadjustedIFRSoperatingprofitbasedonlonger-term investmentreturnsandprofitbeforetaxoftheGroupforthepost-acquisitionperiodfrom27Septemberto31December2018.Thereis nomaterialimpactontheGroup’srevenueandprofitfor2018iftheacquisitionhadoccurredon1January2018. D2 Contingencies and related obligations Litigation and regulatory matters InadditiontothematterssetoutinnoteC11inrelationtotheFinancialConductAuthorityreviewofpastannuitysales,theGroupis involvedinvariouslitigationandregulatoryissues.ThesemayfromtimetotimeincludeclassactionsinvolvingJackson.Whilethe outcomeofsuchlitigationandregulatoryissuescannotbepredictedwithcertainty,theCompanybelievesthattheirultimateoutcome willnothaveamaterialadverseeffectontheGroup’sfinancialcondition,resultsofoperations,orcashflows. Guarantees GuaranteefundsinboththeUKandtheUSprovideforpaymentstobemadetopolicyholdersonbehalfofinsolventlifeinsurance companiesandarefinancedbypaymentsassessedonsolventinsurancecompaniesbasedonlocation,volumeandtypesofbusiness. Theestimatedreserveforfutureguaranteefundassessmentsisnotsignificant.Thedirectorsbelievethatsufficientprovisionhasbeen madeonthebalancesheetforallanticipatedpaymentsforknowninsolvencies. TheGrouphasprovidedotherguaranteesandcommitmentstothird-partiesenteredintointhenormalcourseofbusinessbutthe Groupdoesnotconsiderthattheamountsinvolvedaresignificant. Support for with-profits sub-funds by shareholders’ funds PACisliabletomeetitsobligationstowith-profitspolicyholderseveniftheassetsofthewith-profitssub-fundsareinsufficienttodoso. Theassets,representedbytheunallocatedsurplusofwith-profitsfunds,inexcessofamountsexpectedtobepaidforfutureterminal bonusesandrelatedshareholdertransfers(‘theexcessassets’)inthewith-profitssub-fundscouldbemateriallydepletedovertimeby, forexample,asignificantorsustainedequitymarketdownturn,costsofsignificantfundamentalstrategicchangeoramaterialincreasein thepensionmis-sellingprovision.Intheunlikelycircumstancethatthedepletionoftheexcessassetswithinthelong-termfundwassuch thattheGroup’sabilitytosatisfypolicyholders’reasonableexpectationswasadverselyaffected,itmightbecomenecessarytorestrict theannualdistributiontoshareholdersortocontributeshareholders’fundstothewith-profitssub-fundstoprovidefinancialsupport. Mattersrelatingtowith-profitssub-funds: — Pensionmis-sellingreview–theUKinsuranceregulatorrequiredallUKlifeinsurancecompaniestoreviewsalesofpersonalpensions policiesforpotentialmis-selling.Offersofredresstoallcasesweremadeby30June2002.WhilstPrudentialbelieveditmetthe regulator’srequirementstoissueoffersofredresstoallcustomersby30June2002thereisapopulationofcustomerswho,whilstan attemptwasmadeatthetime,toinvitethemtoparticipateinthereview,maynothavereceivedtheirinvitation.Thesecustomersare 298 Prudential plc AnnualReport2018 www.prudential.co.uk D Other notes continuedbeingre-engagedtoensurethattheyhavetheopportunitytotakepartinthereview.Costsarisingfromthisreviewaremetbythe excessassetsoftheUKwith-profitssub-fundandhencehavenotbeenchargedtotheassetsharesusedinthedeterminationof policyholderbonusrates.Prudentialhasgivenanassurancethatthesedeductionsfromexcessassetswillnotimpactitsbonusor investmentpolicyforpolicieswithinthewith-profitssub-fundsthatwereinforceat31December2003.Thisassurancedoesnot applytonewbusinesssince1January2004.Intheunlikelyeventthatsuchdeductionswouldaffectthebonusorinvestmentpolicyfor therelevantpolicies,Prudentialhasstateditwouldmakeavailablesupporttothesub-fundfromshareholderresourcesforaslongas thesituationcontinued,soastoensurethatpolicyholderswerenotdisadvantaged; — ScottishAmicableInsurancesub-fund–policieswithinthissub-fund(awith-profitssub-fundclosedtonewbusiness)contain minimumlevelsofguaranteedbenefittopolicyholders.Shouldtheassetsofthesub-fundbeinadequatetomeettheguaranteed benefitobligationsofthepolicyholdersofSAIF,theUKwith-profitssub-fundwouldbeliabletocoveranysuchdeficiencyinthefirst instance.Inaddition,certainpensionsproductswithinthissub-fundhaveguaranteedannuityratesatretirement,forwhicha provisionof£361millionwasheldwithinthesub-fund(31December2017:£503million);and — Guaranteedannuities–aprovisionforguaranteedannuityproductsof£49millionwasheld(31December2017:£53million)inthe UKwith-profitssub-fund. Intra-group capital support arrangements PrudentialandPAChaveputinplaceintra-grouparrangementstoformalisecircumstancesinwhichcapitalsupportwouldbemade availablebyPrudential.WhilePrudentialconsidersitunlikelythatsuchsupportwillberequired,thearrangementsareintendedto provideadditionalcomforttoPACanditspolicyholders. Inaddition,Prudentialhasputinplaceintra-grouparrangementstoformaliseundertakingsbyPrudentialtotheregulatorsoftheHong Kongsubsidiariesregardingtheirsolvencylevels. D3 Post balance sheet events Dividends Thesecondinterimordinarydividendfortheyearended31December2018,thatwasapprovedbytheBoardofDirectorsafter 31December2018,isdescribedinnoteB6. Renewal of strategic bancassurance alliance with United Overseas Bank Limited InJanuary2019,theGroupannouncedtherenewalofitsregionalstrategicbancassurancealliancewithUnitedOverseasBankLimited (UOB).Thenewagreementextendstheoriginalalliance,whichcommencedin2010to2034andincreasesthegeographicalscopeto includeafifthmarket,Vietnam,alongsidetheexistingmarketsacrossSingapore,Malaysia,ThailandandIndonesia. Aspartofthistransaction,PrudentialhasagreedtopayUOBaninitialfeeof£662million(translatedusingaSingaporedollar:£ foreignexchangerateof1.7360)fordistributionrightswhichisnotdependentonfuturesalesvolumes.Thisamountwillbepaidinthree instalmentsof£230millioninFebruary2019,£331millioninJanuary2020and£101millioninJanuary2021.InlinewiththeGroup’s policy,theseamountswillbecapitalisedasadistributionrightsintangibleasset. D4 Related party transactions Transactions between the Company and its subsidiaries that are eliminated on consolidation TheCompanyhastransactionsandoutstandingbalanceswithcertainunittrusts,Open-EndedInvestmentCompanies(OEICs), collateraliseddebtobligationsandsimilarentitiesthatarenotconsolidatedandwhereaGroupcompanyactsasmanagerwhichare regardedasrelatedpartiesforthepurposesofIAS24.ThebalancesareincludedintheGroup’sstatementoffinancialpositionatfair valueoramortisedcostinaccordancewithIAS39classifications.Thetransactionsareincludedintheincomestatementandinclude amountspaidonissueofsharesorunits,amountsreceivedoncancellationofsharesorunitsandamountspaidinrespectoftheperiodic chargeandadministrationfee. Inaddition,therearenomaterialtransactionsbetweentheGroup’sjointventuresandassociates,whichareaccountedforonan equitymethodbasisandotherGroupcompanies. ExecutiveofficersandDirectorsoftheCompanymayfromtimetotimepurchaseinsurance,assetmanagementorannuityproducts marketedbyGroupcompaniesintheordinarycourseofbusinessonsubstantiallythesametermsasthoseprevailingatthetimefor comparabletransactionswithotherpersons. In2018and2017,othertransactionswithDirectorswerenotdeemedtobesignificantbothbyvirtueoftheirsizeandinthecontextof theDirectors’financialpositions.Allofthesetransactionsareontermsbroadlyequivalenttothosethatprevailinarm’s-length transactions. ApartfromthesetransactionswithDirectors,noDirectorhadinterestsinshares,transactionsorarrangementsthatrequiredisclosure, otherthanthosegivenintheDirectors’remunerationreport.KeymanagementremunerationisdisclosedinnoteB2.3. www.prudential.co.uk AnnualReport2018 Prudential plc 299 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationD5 Commitments Operating leases and capital commitments TheGroupleasesvariousofficestoconductitsbusiness.Leasesinwhichasignificantportionoftherisksandrewardsofownershipare retainedbythelessorareclassifiedasoperatingleases.Paymentsmadeunderoperatingleases(netofanyincentivesreceivedfromthe lessor)arechargedtotheincomestatementonastraight-linebasisovertheperiodofthelease. Futureminimumleasepaymentsfornon-cancellableoperatingleasesfalldueduringthefollowingperiods: Notlaterthan1year Laterthan1yearandnotlaterthan5years Laterthan5years Futureminimumsub-leaserentalsreceivedfornon-cancellableoperatingleasesforlandandbuildings Minimumleaserentalpaymentsincludedinconsolidatedincomestatement 2018 £m 2017 £m 120 404 408 42 139 113 284 118 56 123 Inaddition,theGrouphasprovided,fromtimetotime,certainguaranteesandcommitmentstothirdpartiesincludingfundingthe purchaseordevelopmentoflandandbuildingsandotherrelatedmatters.Thecontractualobligationstopurchaseordevelopinvestment propertiesat31December2018were£615million(31December2017:£176million). At31December2018,Jacksonhasunfundedcommitmentsof£664million(31December2017:£414million)relatedtoits investmentsinlimitedpartnershipsand£345million(31December2017:£214million)relatedtocommercialmortgageloansandother fixedmaturities.Thesecommitmentswereenteredintointhenormalcourseofbusinessandamaterialadverseimpactontheoperations isnotexpectedtoarisefromthem. At31December2018,UKandEurope’sinsuranceoperationshadunfundedcommitmentsof£3,997million(31December2017: £3,225million)relatedtoprivateequityandinfrastructurefunds.Inaddition,PrudentialCapitalhadunfundedcommitmentsof £155million(31December2017:£162million)relatedtoitsbridgingloans.Thesecommitmentswereenteredintointhenormalcourse ofbusinessandnomaterialadverseimpactontheoperationsisexpectedtoarise. D6 Investments in subsidiary undertakings, joint ventures and associates (a) Dividend restrictions and minimum capital requirements CertainGroupsubsidiariesandjointventuresaresubjecttorestrictionsontheamountoffundstheymaytransferintheformofcash dividendsorotherwisetotheparentcompany. UnderUKcompanylaw,UKcompaniescanonlydeclaredividendsiftheyhavesufficientdistributablereserves.Further,UK insurancecompaniesarerequiredtomaintainsolvencymarginsinaccordancewiththerulesofthePrudentialRegulationAuthority. M&GPrudential’sassetmanagementcompany,M&GInvestmentManagementLtd,isalsorequiredtomaintaincapitalinaccordance withregulatoryrequirementsbeforemakinganydistributiontotheparentcompany. Jacksonissubjecttostatelawsthatlimitthedividendspayabletoitsparentcompanybasedonstatutorycapital,surplusandprioryear earnings.Dividendsinexcessoftheselimitationsrequirepriorregulatoryapproval. TheGroup’ssubsidiaries,jointventuresandassociatesinAsiamayremitdividendstotheGroup,ingeneral,providedthestatutory insurancefundmeetsthecapitaladequacystandardrequiredunderlocalstatutoryregulationsandhassufficientdistributablereserves. ForfurtherdetailsonlocalcapitalregulationsinAsiapleaserefertonoteC12.2. (b) Investments in joint ventures and associates Jointventuresrepresentarrangementswherethecontrollingpartiesthroughcontractualorotheragreementhavetherightstothenet assetsofthearrangements.TheGrouphasshareholder-backedjointventureinsuranceandassetmanagementbusinessesinChinawith CITICGroup,andajointventureassetmanagementbusinessinIndiawithICICIBank.Inaddition,thereisanassetmanagementjoint ventureinHongKongwithBankofChinaInternationalHoldingsLimited(BOCI)andTakafulinsurancejointventureinMalaysia. TheGrouphasvariousjointventuresrelatingtopropertyinvestmentsheldbytheUKwith-profitsfund.Theresultsofthesejoint venturesarereflectedinthemovementintheunallocatedsurplusoftheUKwith-profitsfundsandthereforedonotaffectshareholders’ results. FortheGroup’sjointventuresthatareaccountedforbyusingtheequitymethod,thenetoftaxresultsoftheseoperationsare includedintheGroup’sprofitbeforetax. TheGroup’sassociates,whicharealsoaccountedforundertheequitymethod,includetheIndianinsuranceentity(withthemajority shareholderbeingICICIBank)andPPMSouthAfrica.Inaddition,theGrouphasinvestmentsinOpen-EndedInvestmentCompanies (OEICs),unittrusts,fundsholdingcollateraliseddebtobligations,propertyunittrustsandventurecapitalinvestmentsoftheUK with-profitsfundswheretheGrouphassignificantinfluence.AsallowedunderIAS28,theseinvestmentsareaccountedforonafair valuethroughprofitorlossbasis.Theaggregatefairvalueofassociatesaccountedforatfairvaluethroughprofitorloss,wherethereare publishedpricequotations,isapproximately£1.2billionat31December2018(31December2017:£2.4billion). Forjointventuresandassociatesaccountedforusingtheequitymethod,the12monthsfinancialinformationoftheseinvestmentsup to31December(coveringthesameperiodasthatoftheGroup)hasbeenusedintheseconsolidatedfinancialstatements. 300 Prudential plc AnnualReport2018 www.prudential.co.uk D Other notes continuedKey to classes of shares held LBG LPI MI NSB OS PI PS U LimitedbyGuarantee LimitedPartnershipInterest MembershipInterest Non-stockbasis OrdinaryShares PartnershipInterest PreferenceShares Units TheGroup’sshareoftheprofits(includingshort-termfluctuationsininvestmentreturns),netofrelatedtax,andcarryingamountof interestinjointventuresandassociates,whichareequityaccountedasshownintheconsolidatedincomestatementcomprisesthe following: Joint ventures and associates Shareholder-backedbusiness UKwith-profitsfund(priortooffsettingeffectinmovementinunallocatedsurplus) Total        2018 £m 2017 £m 255 36 291 196 106 302 Share of profits from joint ventures and associates, net of related tax Insurance Asset management Insurance Asset management Asia UK and Europe 2018 2017 178 121 61 60 36 106 16 15 Total segment and Group total 291 302 Thereisnoothercomprehensiveincomeinthejointventuresandassociates.Therehasbeennounrecognisedshareoflossesofajoint ventureorassociatethattheGrouphasstoppedrecognisinginthetotalincome. ThejointventureshavenosignificantcontingentliabilitiesorcapitalcommitmentstowhichtheGroupisexposednordoestheGroup haveanysignificantcontingentliabilitiesorcapitalcommitmentsinrelationtoitsinterestsinthejointventures. (c) Related undertakings InaccordancewithSection409oftheCompaniesAct2006alistofPrudentialGroup’ssubsidiaries,jointventures,associatesand significantholdings(beingholdingsofmorethan20percent)alongwiththeclassesofsharesheld,theregisteredofficeaddressandthe countryofincorporationandtheeffectivepercentageofequityownedat31December2018isdisclosedbelow. Thedefinitionsofasubsidiaryundertaking,jointventureandassociateinaccordancewiththeCompaniesAct2006aredifferentfrom thedefinitionunderIFRS.Asaresult,therelatedundertakingsincludedwithinthelistbelowmaynotbethesameastheundertakings consolidatedintheGroupIFRSfinancialstatements.TheGroup’sconsolidationpolicyisdescribedinnoteA3.1(b). Direct subsidiary undertakings of the parent company, Prudential plc (shares held directly or via nominees) Name of entity M&GPrudentialLimited Prudential(USHoldco1)Limited PrudentialCapitalHoldingCompanyLimited PrudentialCorporationAsiaLimited PrudentialGroupHoldingsLimited Classes of shares held Proportion held Registered office address and country of incorporation OS OS OS OS OS 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 13thFloor,OneInternationalFinanceCentre,1HarbourViewStreet,Central, HongKong 100.00% LaurencePountneyHill,London,EC4R0HH,UK Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the parent company, Prudential plc or its nominees)   Name of entity 95thAvenueRetailBuilding,LLC AberdeenStandardSingaporeEquity AberdeenStandardCashCreation AlliedLifeBrokerageAgency,Inc ANRPII(AIVVIFC),L.P. BOCHKAggressiveGrowthFund BOCHKAsiaPacificEquityFund BOCHKBalancedGrowthFund BOCHKChinaEquityFund BOCHKConservativeGrowthFund BOCHKGlobalBondFund BOCHKInvestmentFunds-BOCHKHongKongEquityFund BOCI-PrudentialAssetManagementLimited Classes of shares held Proportion held Registered office address and country of incorporation MI OS OS OS LPI OS OS OS OS OS OS U OS 100.00% 901S.,Ste.201,SecondSt.,Springfield,IL,62704-7909,UnitedStates 57.73% 21ChurchStreet,CapitalSquare2,#01-01,Singapore049480 22.91% 28thFloorBangkokCityTower,179SouthSathornRoad,Thungmahamek, Sathorn,Bangkok10120,Thailand 100.00% 400EastCourtAvenue,DesMoines,IA50309,USA 36.58% 57.19% 27.18% 49.07% 66.00% 54.00% 30.25% 20.25% 36.00% CaymanCorporateCentre,27HospitalRoad,GeorgeTown,KY-9008, CaymanIslands 27thFloor,BankofChinaTower,1GardenRoad,CentralandWesternDistrict, HongKong 12thFloorand25thFloor,CiticorpCentre,18WhitfieldRoad,CausewayBay, WanChai,HongKong 27/FBankofChinaTower,1GardenRoad,CentralandWesternDistrict, HongKong 12thFloor,25thFloor,CiticorpCentre,18WhitfieldRoad,CausewayBay, WanChai,HongKong 27thFloor,BankofChinaTower,1GardenRoad,CentralandWesternDistrict, HongKong www.prudential.co.uk AnnualReport2018 Prudential plc 301 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationD6 Investments in subsidiary undertakings, joint ventures and associates continued (c) Related undertakings continued Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the parent company, Prudential plc or its nominees) continued Name of entity BOCI-PrudentialTrusteeLimited BrierCapitalLLC Brooke(Holdco1)Inc BrookeLifeInsuranceCompany BWATRetailNominee(1)Limited BWATRetailNominee(2)Limited CalvinF1GPLimited CalvinF2GPLimited CanadaProperty(Trustee)No1Limited CanadaPropertyHoldingsLimited CardinalDistributionParkManagementLimited CarrawayGuildford(NomineeA)Limited CarrawayGuildford(NomineeB)Limited CarrawayGuildfordGeneralPartnerLimited CarrawayGuildfordInvestmentsUnitTrust CarrawayGuildfordLP CentaurusRetailLLP CentreCapitalNon-QualifiedInvestorsIVAIVOrion,LP CentreCapitalNon-QualifiedInvestorsIVAIV-ELS,LP CentreCapitalNon-QualifiedInvestorsIVAIV-RA,LP CentreCapitalNon-QualifiedInvestorsIV,LP CentreCapitalNon-QualifiedInvestorsVAIV-ELSLP CentreCapitalNon-QualifiedInvestorsVLP CEPIV-AChicagoAIVLP CEPIV-ACWVAIVLP CEPIV-ADavenportAIVLP CEPIV-AIndyAIVLP CEPIV-ANMRAIVLP CEPIV-AWBCTAIVLP CFPrudentialEuropeanQISFund CFPrudentialJapaneseQISFund CFPrudentialNorthAmericanQISFund CFPrudentialPacificMarketsTrustFund CFPrudentialUKGrowthQISFund CITIC-CPAssetManagementCo.,Ltd. CITIC-PrudentialFundManagementCo.,Ltd. CITIC-PrudentialLifeInsuranceCompanyLimited ClairvestEquityPartnersIV-ALP CribbsCausewayJVLimited Classes of shares held Proportion held Registered office address and country of incorporation OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS LPI LPI LPI LPI LPI LPI LPI LPI LPI LPI LPI LPI LPI LPI OS OS OS OS OS MI MI MI LPI OS 36.00% 12thFloorand25thFloor,CiticorpCentre,18WhitfieldRoad,CausewayBay, WanChai,HongKong 100.00% 1CorporateWay,Lansing,MI48951,USA 100.00% 1105NorthMarketStreet,Suite1300,Wilmington,DE19801,USA 100.00% 1CorporateWay,Lansing,MI48951,USA 50.00% LaurencePountneyHill,London,EC4R0HH,UK 50.00% 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 100.00% LimeGroveHouse,GreenStreet,StHelier,JE12ST,Jersey 100.00% LaurencePountneyHill,London,EC4R0HH,UK 66.00% 5thFloorCavendishHouse,39WaterlooStreet,Birmingham,B25PP,UK 100.00% 13CastleStreet,StHelier,Jersey,JE45UT 100.00% 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 13CastleStreet,StHelier,Jersey,JE45UT 100.00% LloydsChambers,1PortsokenStreet,London,E18HZ,UK 50.00% 40Broadway,London,SW1H0BU,UK 76.80% 2711CentrevilleRoad,Suite400,Wilmington,DE19808,USA 76.53% 31.92% 73.06% 73.16% 67.16% 31.92% 615SouthDupontHighway,Dover,DE19901,USA 31.95% 850NewBurtonRoad,Suite201,Dover,DE19904,USA 31.92% 615SouthDupontHighway,Dover,DE19901,USA 31.92% 31.92% 31.91% 97.89% 17RochesterRow,London,SW1P1QT,UK 97.99% 98.87% 135Bishopsgate,London,EC2M3UR,UK 98.31% LaurencePountneyHill,London,EC4R0HH,UK 98.92% 17RochesterRow,London,SW1P1QT,UK 26.95% No.128NorthZhangjiabangRoad,PudongDistrict,Shanghai,China 49.00% Level9,HSBCBuilding,ShanghaiIFC,8CenturyAvenue,Pudong,Shanghai,China 50.00% EastTower,WorldFinancialCentre,No.1EastThirdRingMiddleRoad,Chaoyang District,Beijing,China 31.87% 22StClairAvenueEast,Suite1700,Toronto,ONM4T2S3,Canada 50.00% 40Broadway,London,SW1H0BU,UK CribbsCausewayMerchantsAssociationLimited LBG 100.00% TheMallatCribbsCauseway,Bristol,BS345DG,UK CribbsMallNominee(1)Limited CurianCapital,LLC CurianClearingLLC(Michigan) DigitalInfrastructureInvestmentPartnersGPLLP DigitalInfrastructureInvestmentPartnersGP1Limited DigitalInfrastructureInvestmentPartnersLP DigitalInfrastructureInvestmentPartnersSLPGPLLP DigitalInfrastructureInvestmentPartnersSLPGP1Limited DigitalInfrastructureInvestmentPartnersSLPGP2Limited OS OS OS LPI OS LPI LPI OS OS 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 1CorporateWay,Lansing,MI48951,USA 100.00% 65.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 302 Prudential plc AnnualReport2018 www.prudential.co.uk D Other notes continuedClasses of shares held Proportion held 100.00% 100.00% Key to classes of shares held LBG LPI MI NSB OS PI PS U LimitedbyGuarantee LimitedPartnershipInterest MembershipInterest Non-stockbasis OrdinaryShares PartnershipInterest PreferenceShares Units Registered office address and country of incorporation Level25,MenaraHongLeong,No.6JalanDamanlela,BukitDamansara, 50490KualaLumpur,WilayahPersekutuan,Malaysia 15thFloor,ShinhanInvestmentTower,70Yoidae-ro,Youngdungpo-gu,Seoul 07325,Korea 100.00% POBox309,UglandHouse,GrandCayman,KY1-1104,CaymanIslands 89.84% 26,BoulevardRoyal,Luxembourg,L-2449,Luxembourg 100.00% 3/FAziaCenter,1233LujiazuiRingRoad,Shanghai200120,China 97.95% 26,BoulevardRoyal,L-2449,Luxembourg 99.71% 100.00% 100.00% 99.90% 94.89% 98.67% 78.82% 98.69% 52.83% 10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983 31.43% 26,BoulevardRoyal,L-2449,Luxembourg 100.00% 13thFloor,OneInternationalFinanceCentre,1HarbourViewStreet,Central, HongKong 100.00% 26,BoulevardRoyal,L-2449,Luxembourg 100.00% 10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983 99.98% 26,BoulevardRoyal,L-2449,Luxembourg 89.69% 84.57% 68.69% 77.26% 49.64% 81.00% 44.47% 100.00% 90.00% 95.08% 99.13% 26,BoulevardRoyal,Luxembourg,L-2449,Luxembourg 100.00% Level25,MenaraHongLeong,No.6JalanDamanlela,BukitDamansara, 50490KualaLumpur,WilayahPersekutuan,Malaysia 53.72% 26,BoulevardRoyal,L-2449,Luxembourg 35.18% 99.76% 100.00% 23rdFloor,SaigonTradeCenter,37TonDucThangStreet,District1,HoChiMinh City,Vietnam 95.43% 26,BoulevardRoyal,L-2449,Luxembourg 99.99% 98.88% 94.13% 99.89% 100.00% 874WalkerRoad,SuiteC,Dover,DE19904,USA 100.00% 3rdFloor,355NEX,RueduSavoir,CybercityEbene72201,Mauritius 69.74% 26,BoulevardRoyal,L-2449,Luxembourg 100.00% 3rdFloor,355NEX,RueduSavoir,CybercityEbene72201,Mauritius 100.00% 91.89% 26,BoulevardRoyal,L-2449,Luxembourg 100.00% MarunouchiParkBuilding,6-1Marunouchi2-chome,Chiyoda-Ku,Tokyo,Japan 100.00% 26,BoulevardRoyal,L-2449,Luxembourg 99.84% 100.00% 10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983 OS OS PI U OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS U OS OS OS OS MI OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS Name of entity EastspringAl-Wara’InvestmentsBerhad EastspringAssetManagementKoreaCo.Ltd. EastspringInfrastructureDebtFundL.P. EastspringInvestments-JapanEquityFund EastspringInvestmentManagement(Shanghai)CompanyLimited EastspringInvestments-AsianLocalBondFund EastspringInvestments-AsianSmallerCompaniesFund EastspringInvestments-DevelopedandEmergingAsia EquityFund EastspringInvestments-EmergingEurope,MiddleEastandAfrica DynamicFund EastspringInvestments-GlobalEmergingMarketsCustomized EquityFund EastspringInvestments-GlobalEmergingMarketsDynamicFund EastspringInvestments-GlobalLowVolatilityEquityFund EastspringInvestments-GlobalTechnologyFund EastspringInvestments-JapanFundamentalValueFund EastspringInvestments-PanEuropeanFund EastspringInvestments-USHighYieldBondFund EastspringInvestments(HongKong)Limited EastspringInvestments(Luxembourg)SA EastspringInvestments(Singapore)Limited EastspringInvestmentsAsiaPacificEquityFund EastspringInvestmentsAsianBondFund EastspringInvestmentsAsianDynamicFund EastspringInvestmentsAsianEquityFund EastspringInvestmentsAsianEquityIncomeFund EastspringInvestmentsAsianHighYieldBondFund EastspringInvestmentsAsianHighYieldBondMYFund EastspringInvestmentsAsianInfrastructureEquityFund EastspringInvestmentsAsianInvestmentGradeBondFund EastspringInvestmentsAsianLowVolatilityEquityFund EastspringInvestmentsAsianPropertySecuritiesFund EastspringInvestments-AsianTotalReturnBondFund EastspringInvestmentsBerhad EastspringInvestmentsChinaEquityFund EastspringInvestmentsDragonPeacockFund EastspringInvestmentsEuropeanInvGradeBondFund EastspringInvestmentsFundManagementLimited LiabilityCompany EastspringInvestmentsGlobalEmergingMarketsBondFund EastspringInvestmentsGlobalEquityNavigatorFund EastspringInvestmentsGlobalMarketNavigatorFund EastspringInvestmentsGreaterChinaEquityFund EastspringInvestmentsHongKongEquityFund EastspringInvestmentsIncorporated EastspringInvestmentsIndiaConsumerEquityOpenLimited EastspringInvestmentsIndiaEquityFund EastspringInvestmentsIndiaEquityOpenLimited EastspringInvestmentsIndiaInfrastructureEquityOpenLimited EastspringInvestmentsLatinAmericanEquityFund EastspringInvestmentsLimited EastspringInvestmentsGlobalMultiAssetIncomePlusGrowth Fund EastspringInvestmentsNorthAmericaValueFund EastspringInvestmentsServicesPte.Ltd. www.prudential.co.uk AnnualReport2018 Prudential plc 303 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationD6 Investments in subsidiary undertakings, joint ventures and associates continued (c) Related undertakings continued Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the parent company, Prudential plc or its nominees) continued Name of entity EastspringInvestmentsSICAV-FIS-AlternativeInvestmentsFund EastspringInvestmentsSICAV-FIS-AsiaPacificLoanFund EastspringInvestmentsSICAV-FISAfricaEquityFund EastspringInvestmentsSICAV-FISUniversalUSDBondFund EastspringInvestmentsSICAV-FISUniversalUSDBondIIFund EastspringInvestmentsUSBondFund EastspringInvestmentsUSCorporateBondFund EastspringInvestmentsUSEquityIncomeFund EastspringInvestmentsUSHighInvGradeBondFund EastspringInvestmentsUSInvestmentGradeBondFund EastspringInvestmentsUSStrategicIncomeBondFund EastspringInvestmentsUSTotalReturnBondFund EastspringInvestmentsUnitTrust-DragonPeacockFund EastspringInvestmentsUTSingaporeASEANEquityFund EastspringInvestmentsUTSingaporeSelectBondFund EastspringInvestmentsWorldValueEquityFund EastspringOverseasInvestmentFundManagement(Shanghai) CompanyLimited EastspringRealAssetsPartners EastspringSecuritiesInvestmentTrustCo.,Ltd. EdgerInvestmentsLimited Classes of shares held Proportion held Registered office address and country of incorporation OS OS U OS OS OS OS U OS OS OS OS U OS OS OS OS OS OS OS 100.00% 26,BoulevardRoyal,L-2449,Luxembourg 100.00% 100.00% 99.94% 100.00% 32.87% 89.61% 99.50% 92.77% 56.87% 100.00% 100.00% 97.40% EastspringInvestments(Singapore)Limited,MarinaBayFinancialCentre,10, MarinaBoulevard,#32-01,Singapore018983 100.00% 10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983 85.39% 92.28% 26,BoulevardRoyal,L-2449,Luxembourg 100.00% Unit306-308,3/FAziaCenter,1233LujiazuiRingRoad,China(Shanghai)PilotFree TradeZone,China 100.00% POBox309,UglandHouse,GrandCayman,KY1-1104,CaymanIslands 99.54% 4thFloor,No.1SongzhiRoad,Taipei110,Taiwan 100.00% LaurencePountneyHill,London,EC4R0HH,UK EdinburghPark(Management)Limited LBG 100.00% 1ExchangeCrescent,ConferenceSquare,Edinburgh,EH38UL,UK EmbankmentGPLimited EmbankmentNominee1Limited EmbankmentNominee2Limited EmpireHoldingSARL(Inliquidation) EuropeanSpecialistInvestmentFunds-M&GTotalReturnCredit InvestmentFund FalanGPLimited FashionSquareECOLP(Inliquidation) FidelityFunds-JapanFund FirstStateChinaFocusFund FirstStateGlobalPropertyA FiveHotelHolding,LLC FoliosIIIDesignatedActivityCompany FoudryPropertiesLimited FubonChinaCurrencyFund FubonGlobalInvestmentGradeBondFund FurnivalInsuranceCompanyPCCLimited GennyGP1LLP GennyGP2Limited GennyGPLimited GeorgeDigitalGP1LLP GeorgeDigitalGP2Limited GeorgeDigitalGPLimited GGEGPLimited GreenGPLimited OS OS OS OS OS OS LPI OS OS OS MI OS OS OS OS OS LPI OS OS LPI OS OS OS OS 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 5,rueGuilllaumeKroll,L-1882,Luxembourg 26.13% 80,routed’Esch,L-1470,Luxembourg 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 1209OrangeStreet,Wilmington,DE19801,USA 23.56% 2A,RueAlbertBorschette,BP274,Luxembourg,LU-LUL-1246,Luxembourg 60.97% 70SirJohnRogerson’sQuayDublin2D02R296Ireland 42.35% GroundFloor,Tower1,DarlingPark,201SussexStreet,Sydney,NSW2001, Australia 100.00% CTCorporationSystem,208SouthLaSalleStreet,Suite814,Chicago,IL60604, USA 60.00% FourthFloor,76LowerBaggotStreet,Dublin2 50.00% ClearwaterCourt,VasternRoad,ReadingRG18DB,UK 25.10% 8F,No.108,Sec.1,DunhuaS.Rd.,SongshanDist.,Taipei,Taiwan 47.80% 8F,No.108,Sec.1,DunhuaS.Rd.,SongshanDist.,Taipei,Taiwan 100.00% ThirdFloor,LaPlaiderieChambers,LaPlaiderie,StPeterPort,Guernsey,GY11WG 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 304 Prudential plc AnnualReport2018 www.prudential.co.uk D Other notes continuedKey to classes of shares held LBG LPI MI NSB OS PI PS U LimitedbyGuarantee LimitedPartnershipInterest MembershipInterest Non-stockbasis OrdinaryShares PartnershipInterest PreferenceShares Units Classes of shares held Proportion held Registered office address and country of incorporation OS OS OS OS OS OS OS MI OS OS OS OS OS OS OS OS OS LPI OS OS OS LPI OS OS OS OS LPI OS OS LPI OS LPI LPI OS OS OS OS LPI LPI OS OS LPI LPI OS OS LPI OS OS LPI LPI LPI LPI OS LPI LPI OS OS 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 100.00% 1CorporateWay,Lansing,MI48951,USA 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% InternationalHouse,CastleHill,VictoriaRoad,Douglas,IM24RB,IsleofMan 100.00% 874WalkerRoad,SuiteC,Dover,DE19904,USA 100.00% LaurencePountneyHill,London,EC4R0HH,UK 49.00% 12thFloor,NarainManzil,23,BarakhambaRoad,NewDelhi110001,India 25.82% 25.82% ICICIPruLifeTowers,1089AppasahebMaratheMarg,Prabhadevi,Mumbai 400025,India 49.00% 12thFloor,NarainManzil,23,BarakhambaRoad,NewDelhi110001,India 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 100.00% 100.00% LaurencePountneyHill,London,EC4R0HH,England 100.00% 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 100.00% 100.00% 100.00% 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 26.52% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 100.00% 31.56% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 100.00% 6,rueEugèneRuppert,L-245,Luxembourg Name of entity Greenpark(Reading)GeneralPartnerLimited Greenpark(Reading)NomineeNo.1Limited GreenPark(Reading)NomineeNo.2Limited GSTwentyTwoLimited HermitageManagementLLC HolbornBarsNomineesLimited HoltwoodLimited(inliquidation) HudsonSeasons,LLC HydeHoldco1Limited ICICIPrudentialAssetManagementCompanyLimited ICICIPrudentialLifeInsuranceCompanyLimited ICICIPrudentialPensionFundsManagementCompany ICICIPrudentialTrustLimited Infracapital(AIRI)GPLimited Infracapital(Belmond)GPLimited Infracapital(Bio)GPLimited Infracapital(Churchill)GP1Limited Infracapital(Churchill)GPLLP Infracapital(GC)GPLimited Infracapital(Gigaclear)GP1Limited Infracapital(Gigaclear)GP2Limited Infracapital(Gigaclear)GPLLP Infracapital(ITPPP)GPLimited Infracapital(Leo)GPLimited Infracapital(Sense)GPLimited Infracapital(TLSB)GPLimited Infracapital(TLSB)SLPLP InfracapitalABPGPLimited(Inliquidation) InfracapitalCIIILimited InfracapitalDFIIGPLLP InfracapitalDFIILimited InfracapitalEmployeeFeederGP1LLP InfracapitalEmployeeFeederGP2LLP InfracapitalEmployeeFeederGPLimited InfracapitalF1GP2Limited InfracapitalF2GP1Limited InfracapitalF2GP2Limited InfracapitalGP1LLP InfracapitalGP2LLP InfracapitalGPIILimited InfracapitalGPLimited InfracapitalGreenfieldDFGPLLP InfracapitalGreenfieldPartners1SLPGPLLP InfracapitalGreenfieldPartners1SLPGP1Limited InfracapitalGreenfieldPartners1SLPGP2Limited InfracapitalGreenfieldPartnersIEmployeeFeederGPLLP InfracapitalGreenfieldPartnersIGP1Limited InfracapitalGreenfieldPartnersIGP2Limited InfracapitalGreenfieldPartnersIGPLLP InfracapitalGreenfieldPartnersILP InfracapitalGreenfieldPartnersISLP2GPLLP InfracapitalGreenfieldPartnersISubholdingsGPLLP InfracapitalGreenfieldPartnersISubholdingsGP1Limited InfracapitalPartnersIILP InfracapitalPartnersIISubholdingsGPLLP InfracapitalPartnersIISubholdingsGP1Limited InfracapitalPartnersIIIGPSARL www.prudential.co.uk AnnualReport2018 Prudential plc 305 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationD6 Investments in subsidiary undertakings, joint ventures and associates continued (c) Related undertakings continued Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the parent company, Prudential plc or its nominees) continued Name of entity InfracapitalPartnersIIISubholdings(Euro)GPLLP InfracapitalPartnersIIISubholdings(Sterling)GPLLP InfracapitalPartnersIIISubholdingsGP1Limited InfracapitalPartnersIIISubholdingsGP2Limited InfracapitalPartnersLP InfracapitalRFGPLimited InfracapitalSisuGPLimited InfracapitalSLPIIGPLLP InfracapitalSLPIILP InfracapitalSLPLimited InnisfreeM&GPPPLLP InnisfreeM&GPPPLP InvescoFixedMaturitySelectiveEmergingMarketBonds2024 INVESTFinancialCompanyInsuranceAgencyLLCofIllinois JacksonCharitableFoundationInc JacksonHoldingsLLC JacksonNationalAssetManagementLLC JacksonNationalLife(Bermuda)Limited JacksonNationalLifeDistributorsLLC JacksonNationalLifeInsuranceCompany JacksonNationalLifeInsuranceCompanyofNewYork JefferiesCapitalPartnersV,L.P. JNLGlobalCreditLLC LionCreditOpportunityFundPublicLimitedCompany-Credit OpportunityFundXV LIPPSARL(Inliquidation) LivicosLimited(Inliquidation) LondonStoneInvestmentsF3EmployeeFeederGPLLP LondonStoneInvestmentsF3ILimited LondonStoneInvestmentsF3IILimited LondonStoneInvestmentsF3SPGPLLP M&G(Guernsey)Limited M&GAlternativesInvestmentManagementLimited M&GAsiaPropertyFund M&GCorporatebondFund M&GDividendFund M&GEpisodeMacroFund M&GEuropeanCreditInvestmentFund M&GEuropeanHighYieldCreditInvestmentFund M&GEuropeanPropertyFundSICAV-FIS M&GEuropeanSecuredPropertyIncomeFund M&GEuropeanSelectFund M&GEuropeanStrategicValueFund M&GFinancialServicesLimited M&GFounders1Limited M&GGeneralPartnerInc M&GGilt&FixedInterestIncomeFund M&GGroupLimited M&GIMPPP1Limited M&GInternationalInvestmentsNomineesLimited Classes of shares held Proportion held Registered office address and country of incorporation LPI LPI OS OS LPI OS OS LPI LPI OS LPI LPI OS OS 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 33.04% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 100.00% 34.00% 100.00% LaurencePountneyHill,London,EC4R0HH,UK 35.00% BoundaryHouse,91-93CharterhouseStreet,London,EC1M6HR,UK 62.22% 57.31% 22ndFloor,No.1SongzhiRoad,Taipei,TW-TPE11047,Taiwan 100.00% 208SouthLaSalleStreet,Chicago,IL60604,USA NSB 100.00% 1CorporateWay,Lansing,MI48951,USA OS OS OS OS OS OS LPI OS OS OS OS LPI OS OS LPI OS OS OS OS OS OS OS OS OS U OS OS OS OS OS OS OS OS OS 100.00% 1105NorthMarketStreet,Suite1300,Wilmington,DE19801,USA 100.00% 1CorporateWay,Lansing,MI48951,USA 100.00% CedarHouse,Hamilton,Bermuda 100.00% 1209OrangeStreet,Wilmington,DE19801,USA 100.00% 1CorporateWay,Lansing,MI48951,USA 100.00% 2900WestchesterAvenue,Suite305,Purchase,NY10577,USA 21.92% 1209OrangeStreet,Wilmington,DE19801,USA 100.00% 874WalkerRoad,SuiteC,CityofDover,CountyofKent,StateofDelaware19904, UnitedStates 98.44% 53MerrionSquareSouth,Dublin2,D02PR63,Ireland 100.00% 5,rueGuilllaumeKroll,L-1882,Luxembourg 100.00% MontagueHouse,AdelaideRoad,Dublin2,D02K039,Ireland 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 100.00% 100.00% 100.00% DoreyCourt,AdmiralPark,St.PeterPort,GY12HT,Guernsey 100.00% LaurencePountneyHill,London,EC4R0HH,UK 54.01% 34-38,AvenuedelaLiberté,L-1930,Luxembourg 30.96% LaurencePountneyHill,London,EC4R0HH,UK 58.33% LaurencePountneyHill,London,EC4R0HH,UK 23.92% 82.48% 80,routed’Esch,L-1470,Luxembourg 99.99% 49.74% 34-38,AvenuedelaLiberté,L-1930,Luxembourg 23.98% 41.53% LaurencePountneyHill,London,EC4R0HH,UK 79.22% 100.00% 100.00% 100.00% WalkerHouse,87MaryStreet,GrandCayman,KY1-9002,CaymanIslands 49.65% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 306 Prudential plc AnnualReport2018 www.prudential.co.uk D Other notes continuedKey to classes of shares held LBG LPI MI NSB OS PI PS U LimitedbyGuarantee LimitedPartnershipInterest MembershipInterest Non-stockbasis OrdinaryShares PartnershipInterest PreferenceShares Units Classes of shares held Proportion held Registered office address and country of incorporation OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS LPI OS OS LPI LPI OS OS OS OS LPI LPI OS OS OS OS OS OS OS LPI LPI OS OS OS OS LPI OS OS OS LPI OS OS OS OS OS OS 100.00% 34-38,AvenuedelaLiberté,L-1930,Luxembourg 100.00% Talstrasse66,8001Zurich,Switzerland 41.56% LaurencePountneyHill,London,EC4R0HH,UK 20.00% 51.96% 22.35% 59.02% 100.00% 100.00% 251LittleFallsDrive,Wilmington,DE,19801 100.00% Level16,GrosvenorPlace,225GeorgeStreet,Sydney,NSW2000,Australia 100.00% 6thFloor,AlexandraHouse,18ChaterRoad,Central,HongKong 100.00% 10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983 100.00% 3-1Toranomon,4Chome,Minato-ku,Tokyo,Japan 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 34-38,AvenuedelaLiberté,L-1930,Luxembourg 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 25.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% PlazadeColon,TorreII,Planta14,28046,Madrid,Spain 100.00% LaurencePountneyHill,London,EC4R0HH 100.00% 100.00% 10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983 100.00% 46.00% 4thFloor,76LowerBaggotStreet,Dublin2,D02Ek81 100.00% 34-38,AvenuedelaLiberté,L-1930,Luxembourg 100.00% ShiroyamaTrustTower,Tokyo,Japan 100.00% KyoboBuilding,Seoul,Korea 100.00% LaurencePountneyHill,London,EC4R0HH,UK 50.10% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% ThirdFloor,LaPlaiderieChambers,LaPlaiderie,StPeterPort,Guernsey,GY11WG 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 28.00% 100.00% 100.00% ThirdFloor,LaPlaiderieChambers,LaPlaiderie,StPeterPort,Guernsey,GY11WG 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 25.00% 100.00% 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 100.00% 78SirJohnRogerson’sQuay,Dublin2,D02RK57,Ireland Name of entity M&GInternationalInvestmentsSA M&GInternationalInvestmentsSwitzerlandAG M&GInvestmentFunds(10)-M&GAbsoluteReturnBondFund M&GInvestmentFunds(10)-M&GGlobalListedInfrastructure Fund M&GInvestmentFunds(10)-M&GPositiveImpactFund M&GInvestmentFunds(4)-M&GEpisodeAllocationFund M&GInvestmentFunds(7)-M&GGlobalConvertiblesFund M&GInvestmentManagementLimited M&GInvestments(Americas)Inc. M&GInvestments(Australia)PtyLtd M&GInvestments(HongKong)Limited M&GInvestments(Singapore)Pte.Ltd. M&GInvestmentsJapanCo.,LTD M&GLimited M&GLuxembourgSA M&GManagementServicesLimited M&GNomineesLimited M&GPFI2018GPLLP M&GPFI2018GP1Limited M&GPFI2018GP2Limited M&GPFICarryPartnership2016LP M&GPFIPartnership2018LP M&GPlatformNomineesLimited M&GPrudential(Holdings)Limited M&GPrudentialServiceCompanyLimited M&GREEspana2016S.L. M&GREUKEV(GP1)LLP M&GREUKEV1-ALP M&GRealEstateAsiaHoldingCompanyPte.Ltd M&GRealEstateAsiaPTE.Ltd M&GRealEstateDebtFinanceVIDesignatedActivityCompany M&GRealEstateFundsManagementSARL M&GRealEstateJapanCo.Ltd. M&GRealEstateKoreaCo.Ltd. M&GRealEstateLimited M&GRealEstateUKEnhancedValueLP M&GRealEstateUKEV(GP)LLP M&GREDEmployeeFeederGPLimited M&GREDIIEmployeeFeederGPLimited M&GREDIIGPLimited M&GREDIISLPGPLimited M&GREDIISLPLP M&GREDIIIEmployeeFeederGPLimited M&GREDIIIGPLimited M&GREDIIISLPGPLimited M&GREDIIISLPLP M&GREDSLPGPLimited M&GRPFGPLimited M&GRPFNominee1Limited M&GRPFNominee2Limited M&GSecuritiesLimited M&GSIFManagementCompany(Ireland)Limited www.prudential.co.uk AnnualReport2018 Prudential plc 307 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationD6 Investments in subsidiary undertakings, joint ventures and associates continued (c) Related undertakings continued Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the parent company, Prudential plc or its nominees) continued Name of entity M&GSpecialtyFinanceFund(GP)Sárl M&GSpecialtyFinanceFundCarryInterestPartnership(GP)Sárl M&GUKCompaniesFinancingFundIILP M&GUKPropertyFund M&GUKPropertyGPLimited M&GUKPropertyNominee1Limited M&GUKPropertyNominee2Limited M&GUKResidentialPropertyFund M&GUKCFIIGPLimited M&GUKEV(SLP)GeneralPartnerLLP M&GUKEV(SLP)LP ManchesterJVLimited ManchesterNominee(1)Limited ManulifeAsiaPacificBondFund ManulifeChinaDimSumHighYieldBondFund ManulifeChinaOffshoreBondFund ManulifeSuperiorSelectionChinaFund ManulifeUSDHighYieldBondFund MCFS.r.l MinsterCourtEstateManagementLimited MissionPlansofAmerica,Inc Murphy&PartnersFund,LP NAPIREIT,Inc NationalPlanningHoldings,LLC NomuraSixYearsFixedMaturityEmergingMarketBondFund NorthSathornHoldingsCompanyLimited NovaSepaduSdn.Bhd.(Inliquidation) OaktreeBusinessParkLimited OldKingsway,LP OptimusPointManagementCompanyLimited Pacus(UK)Limited PCAIPServicesLimited PCALifeAssuranceCo.Ltd. PCAReinsuranceCo.Ltd. PGDS(UKOne)Limited PGDS(USOne)LLC PGFManagementCompany(Ireland)Limited PPMAmericaCapitalPartnersII,LLC PPMAmericaCapitalPartnersIV,LLC PPMAmericaCapitalPartnersV,LLC PPMAmericaCapitalPartnersVI,LLC PPMAmericaCapitalPartnersVII,LLC PPMAmericaPrivateEquityFundIIILP PPMAmericaPrivateEquityFundIVLP PPMAmericaPrivateEquityFundVLP PPMAmericaPrivateEquityFundVILP PPMAmericaPrivateEquityFundVIILP PPMAmerica,Inc Classes of shares held Proportion held Registered office address and country of incorporation OS OS LPI OS OS OS OS LPI OS LPI LPI OS OS OS OS OS OS U LPI OS OS LPI OS OS OS OS OS OS LPI OS OS OS OS OS OS OS OS MI MI MI MI MI LPI LPI LPI LPI LPI OS 100.00% 51,AvenueJ.F.Kennedy,L-1855Luxembourg 100.00% 48.32% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 16,BoulevardRoyal,L-2449,Luxembourg 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 58.42% 34-38,avenuedelaLiberté,L-1931,Luxembourg 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 50.00% 40Broadway,London,SW1H0BU,UK 100.00% LaurencePountneyHill,London,EC4R0HH,UK 20.33% 9thFloor,89SungrenRoad,Taipei,TW-TPE11073,Taiwan 36.45% 51.39% 21.74% 25.73% 45.00% ViaRomagnosi18/a,00196Roma,Italy 75.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 1999BryanStreet,Suite900,Dallas,TX75201,USA 21.07% 2711CentrevilleRoad,Suite400,Wilmington,DE19808,USA 99.00% 300ELombardStreet,Baltimore,MD21202,USA 100.00% 1209OrangeStreet,Wilmington,DE19801,USA 43.40% 101Tower,30F,No.7Sec.5,Taipei,Taiwan 100.00% 3RajanakarnBuilding,20thFloor,SouthSathornRoad,YannawaSubdistrict, SathornDistrict,Bangkok,Thailand 51.00% Suite1005,10thFloorWismaHamzah-KwongHing,No.1LebohAmpang,50100 KualaLumpur,Malaysia 12.50% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 2711CentrevilleRoad,Suite400,Wilmington,DE19808,USA 100.00% BarratHouseCartwrightWay,BardonHill,Coalville,LE671UF,UK 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 13thFloor,OneInternationalFinanceCentre,1HarbourViewStreet,Central, HongKong 99.79% 8thFloor,No.1SongzhiRoad,Taipei11047,Taiwan 100.00% UnitLevel13(A),MainOfficeTower,FinancialParkLabuan,JalanMerdeka,87000 FederalTerritoryofLabuan,Malaysia 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 1209OrangeStreet,Wilmington,DE19801,USA 50.00% 5George’sDock,Dublin1,D01X8N7,Ireland 60.50% 774WalkerRoad,SuiteC,Dover,DE19904,USA 874WalkerRoad,SuiteC,CityofDover,CountyofKent,StateofDelaware19904, UnitedStates 34.50% 34.00% 32.00% 100.00% 99.81% 99.84% 99.84% 99.85% 100.00% 100.00% 308 Prudential plc AnnualReport2018 www.prudential.co.uk D Other notes continuedKey to classes of shares held LBG LPI MI NSB OS PI PS U LimitedbyGuarantee LimitedPartnershipInterest MembershipInterest Non-stockbasis OrdinaryShares PartnershipInterest PreferenceShares Units Classes of shares held Proportion held Registered office address and country of incorporation OS OS PS OS OS OS OS OS OS OS OS OS MI MI OS LPI OS OS PS OS OS OS OS LBG OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% POBox1093,QueensgateHouse,GrandCaymanKY1-1102,CaymanIslands 100.00% QueensgateHouse,SouthChurchStreet,GeorgeTown,GrandCaymanKY1-1102, CaymanIslands 100.00% POBox1093,QueensgateHouse,GrandCaymanKY1-1102,CaymanIslands 100.00% 774WalkerRoad,SuiteC,Dover,DE19904,USA 100.00% 84StateStreet,MA,Boston,Suffolk,02109 99.00% C/OPPMAmerica,Inc.,WestWackerDrive,Suite1200,60606,Chicago,USA 99.00% 96.00% 97.00% 87.00% 100.00% 774WalkerRoad,SuiteC,Dover,DE19904,USA 100.00% 100.00% 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 25.00% 100.00% GloucesterTower,15QueensRoad,Central,HongKong 100.00% LaurencePountneyHill,London,EC4R0HH,UK 14.27% 7thfloor,ProsperityMillenniaPlaza,663King’sRoad,NorthPoint,HongKong 50.00% BowBellsHouse,1BreadStreet,London,EC4M9HH,UK 100.00% 100.00% 9thFloor,UptownPlaceTower1,1East11thDrive,UptownBonifacio,1634Taguig City,MetroManila,Philippines 2/F.,UptownParade2,36thStreet,UptownBonifacio,1634TaguigCity, Philippines 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 13thFloor,OneInternationalFinanceCentre,1HarbourViewStreet,Central, HongKong 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 20thFloor,#445,MonivongBlvd,BoeungProlit,7Makara,PhnomPenhTower, PhnomPenh,Cambodia 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 5thNgongAvenue,Nairobi,Kenya 100.00% 30CecilStreet,#30-01PrudentialTower,Singapore049712 51.00% Level3,MenaraPrudential,No.10JalanSultanIsmail,50250KualaLumpur, Malaysia 100.00% KampalaRoad,Kampala,Uganda 49.00% Level8A,MenaraPrudential,No.10JalanSultanIsmail,50250KualaLumpur, Malaysia 100.00% 10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% c/oHighgateLegalPtyLtd,33LexingtonDrive,BellaVista,NSW2153,Australia 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 1,RueHildegardvonBingen,L-1282Luxembourg 100.00% 100.00% 100.00% Craigforth,Stirling,FK94UE,UK 25.49% 17RochesterRow,London,SW1P1QT,UK 28.77% 34.19% 34.55% 30.20% 53.48% 37.69% 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% Name of entity PPMCapital(Holdings)Limited PPMCLO2Ltd. PPMCLO2018-1Ltd. PPMCLO3Ltd. PPMFinance,Inc PPMFunds PPMFunds-PPMCorePlusFixedIncomeFund PPMFunds-PPMCreditFund PPMFunds-PPMFloatingRateIncomeFund PPMFunds-PPMHighYieldCoreFund PPMFunds-PPMStrategicIncomeFund PPMHoldings,Inc PPMLoanManagementCompanyLLC PPMLoanManagementHoldingCompanyLLC PPMManagersGPLimited PPMManagersPartnershipCIVII(A)LP PPMVentures(Asia)Limited(Inliquidation) PPMCFirstNomineesLimited PreneticsLimited PropertyPartners(TwoRivers)Limited PruLifeInsuranceCorporationofU.K. PruLifeUKAssetManagementandTrustCorporation PruLimited PrudenceFoundation PrudenceLimited Prudential(Cambodia)LifeAssurancePlc Prudential/M&GUKCFGPLimited PrudentialAfricaHoldingsLimited PrudentialAfricaServicesLimited PrudentialAssuranceCompanySingapore(Pte)Limited PrudentialAssuranceMalaysiaBerhad* PrudentialAssuranceUgandaLimited PrudentialBSNTakafulBerhad† PrudentialCapital(Singapore)Pte.Ltd. PrudentialCapitalplc PrudentialCorporatePensionsTrusteeLimited PrudentialCorporationAustralasiaHoldingsPtyLimited PrudentialCorporationHoldingsLimited PrudentialCreditOpportunities1SARL PrudentialCreditOpportunitiesGPSARL PrudentialCreditOpportunitiesScsp PrudentialDistributionLimited PrudentialDynamic0-30Portfolio PrudentialDynamic10-40Portfolio PrudentialDynamic20-55Portfolio PrudentialDynamic40-80Portfolio PrudentialDynamic60-100Portfolio PrudentialDynamicFocused0-30Portfolio PrudentialDynamicFocused20-55Portfolio PrudentialEquityReleaseMortgagesLimited PrudentialFinancialPlanningLimited PrudentialFinancialServicesLimited PrudentialFiveLimited www.prudential.co.uk AnnualReport2018 Prudential plc 309 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationD6 Investments in subsidiary undertakings, joint ventures and associates continued (c) Related undertakings continued Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the parent company, Prudential plc or its nominees) continued Name of entity PrudentialGeneralInsuranceHongKongLimited PrudentialGlobalServicesPrivateLimited PrudentialGPLimited PrudentialGreenfieldGPLLP PrudentialGreenfieldGP1Limited PrudentialGreenfieldGP2Limited PrudentialGreenfieldLP PrudentialGreenfieldSLPGPLLP PrudentialGroupPensionsLimited PrudentialGroupSecretarialServicesLimited PrudentialHolbornLifeLimited PrudentialHoldingsLimited PrudentialHongKongLimited PrudentialInternationalAssuranceplc PrudentialInternationalManagementServicesLimited PrudentialInternationalStaffPensionsLimited PrudentialInvestment(Luxembourg)2SARL PrudentialInvestmentsLimited PrudentialIPServicesLimited PrudentialLeasingServicesLimited PrudentialLifeAssurance(Lao)CompanyLimited PrudentialLifeAssurance(Thailand)PublicCompanyLimited PrudentialLifeAssuranceKenyaLimited PrudentialLifeAssuranceZambiaLimited PrudentialLifeInsuranceGhanaLimited PrudentialLifetimeMortgagesLimited PrudentialLoanInvestments1SARL PrudentialLoanInvestmentsGPSARL PrudentialLoanInvestmentsSCSp PrudentialMauritiusHoldingsLimited PrudentialMortgagesLimited PrudentialNomineesLimited PrudentialPensionsLimited PrudentialPensionsManagementZambiaLimited PrudentialPolskasp.z.o.o PrudentialPortfolioManagementGroupLimited PrudentialPortfolioManagers(SouthAfrica)(Pty)Limited PrudentialPortfolioManagersLimited PrudentialPropertiesTrustyPtyLimited PrudentialPropertyHoldingLimited(Inliquidation) PrudentialPropertyInvestmentManagersLimited PrudentialPropertyInvestmentsLimited PrudentialPropertyServicesLimited PrudentialProtectLimited PrudentialRealEstateInvestments1Limited PrudentialRealEstateInvestments2Limited PrudentialRealEstateInvestments3Limited Classes of shares held Proportion held Registered office address and country of incorporation OS OS OS LPI OS OS LPI LPI OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS OS PS OS OS OS OS OS OS OS OS OS OS 100.00% 59thFloor,OneIslandEast,18WestlandsRoad,QuarryBay,HongKong 100.00% PrudentialHouse,Mumbai,India 100.00% Craigforth,Stirling,FK94UE,UK 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% Craigforth,Stirling,FK94UE,UK 100.00% 59thFloor,OneIslandEast,18WestlandsRoad,QuarryBay,HongKong 100.00% MontagueHouse,AdelaideRoad,Dublin2,D02K039,Ireland 100.00% 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 34-38,AvenuedelaLiberté,L-1930,Luxembourg 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% UnitA,6thFloor,VientianePlazaHotelOfficeBuilding,SailomRoad,HatsadyNeua Village,ChanthaboulyDistrict,VientianeCapital,Lao,PDR 99.93% 9/9SathornBuilding,20th–27thFloor,SouthSathornRoad,Yannawa,Sahtorn, Bangkok10120,Thailand 100.00% 5thNgongAvenue,Nairobi,Kenya 100.00% PrudentialHouse,ThaboMbekiRoad,Lusaka,Zambia 100.00% 35NorthStreet,Accra,Ghana 100.00% 100.00% Craigforth,Stirling,FK94UE,UK 100.00% 1,RueHildegardvonBingen,L-1282Luxembourg 100.00% 100.00% 100.00% 3rdFloor,355NEX,RueduSavoir,CybercityEbene,72201,Mauritius 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% PrudentialHouse,ThaboMbekiRoad,Lusaka,Zambia 100.00% 02-670Warszawa,Pulawska182,Poland 100.00% LaurencePountneyHill,London,EC4R0HH,UK OS AClassOS 49.99% 75.00% POBox44813,Claremont7735,SouthAfrica OS OS OS OS OS PS OS OS OS OS OS 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% DarlingParkTower2,201SussexStreet,Sydney,NSW2000,Australia 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 310 Prudential plc AnnualReport2018 www.prudential.co.uk D Other notes continuedClasses of shares held Proportion held 100.00% 100.00% 100.00% 100.00% Key to classes of shares held LBG LPI MI NSB OS PI PS U LimitedbyGuarantee LimitedPartnershipInterest MembershipInterest Non-stockbasis OrdinaryShares PartnershipInterest PreferenceShares Units Registered office address and country of incorporation c/oMazarsLLP,90St.VincentStreet,Glasgow,G25UB,UK Suite1005,10thFloor,WismaHamzah-KwongHing,No.1LebohAmpang,50100 KualaLumpur,Malaysia 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 1WallichStreet,#19-01GuocoTower,Singapore078881 100.00% 30CecilStreet,#30-01PrudentialTower,Singapore049712 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Craigforth,Stirling,FK94UE,UK 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 25thFloor,SaigonTradeCentre,37TonDucThangStreet,District1,HoChiMinh City,Vietnam 34.42% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 99.95% PrudentialTower,JI.JendralSudirmanKav.79,12910,JakartaSelatan,Indonesia 94.62% 100.00% 13thFloor,OneInternationalFinanceCentre,1HarbourViewStreet,Central, HongKong 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 2711CentrevilleRoad,Suite400,Wilmington,DE19808,USA 100.00% 1999BryanStreet,Suite900,Dallas,TX75201,USA 99.95% PrudentialTower,JI.JendralSudirmanKav.79,12910,JakartaSelatan,Indonesia 97.31% 64.64% 86.64% 98.33% 91.97% 69.58% 99.37% PrudentialTower23rdfloor.Jln.JenderalSudirmanKavling79,SouthJakarta- 12910,Indonesia 100.00% 10MarinaBoulevard,#32-01,MarinaBayFinancialCentre,Singapore018983 100.00% 50LothianRoad,FestivalSquare,Edinburgh,EH39WJ,UK 100.00% 100.00% 1209OrangeStreet,Wilmington,DE19801,USA 28.05% 7-8thFloor,SCBParkPlaza1,18RatchadapisekRoad,Chatuchak,Bangkok10900 Thailand 49.72% 138MarketStreet,#23-01CapitaGreen,Singapore048946 46.83% SchroderInvestmentManagement(Guernsey)Limited,RegencyCourtGlategny Esplanade,GlategnyEsplanade,StPeterPortGY13UF,Guernsey 61.92% CapitaGreen,#23-01,CapitaGreen,Singapore048946,Singapore 41.40% HSBCInstitutionalTrustService(Asia)Limited,1Queen'sRoadCentral, HongKong. 100.00% Craigforth,Stirling,FK94UE,UK 100.00% 100.00% 100.00% 100.00% 45.00% 30CecilStreet#23-02PrudentialTower,Singapore,049712 100.00% LimeGroveHouse,GreenStreet,StHelier,Jersey,JE12ST 100.00% 32.60% 5thFloorCavendishHouse,39WaterlooStreet,Birmingham,B25PP,UK OS PS OS PS OS OS OS OS OS OS LPI OS OS OS OS OS OS OS LPI OS OS OS OS OS LPI OS OS U OS OS OS OS OS U OS OS OS OS OS OS OS OS OS OS OS OS Name of entity PrudentialRetirementIncomeLimited(Inliquidation) PrudentialServicesAsiaSdn.Bhd. PrudentialServicesLimited PrudentialServicesSingaporePte.Ltd. PrudentialSingaporeHoldingsPte.Limited PrudentialStaffPensionsLimited PrudentialTrusteeCompanyLimited PrudentialUKRealEstateGeneralPartnerLimited PrudentialUKRealEstateLP PrudentialUKRealEstateNominee1Limited PrudentialUKRealEstateNominee2Limited PrudentialUKServicesLimited PrudentialUnitTrustsLimited PrudentialVentureManagersLimited PrudentialVietnamAssurancePrivateLimited PrudentialVietnamFinanceCompanyLimited Prudential/M&GUKCompaniesFinancingFundLP PrutecLimited PT.EastspringInvestmentsIndonesia PT.PrudentialLifeAssurance PVFCFinancialLimited PVMPartnershipsLimited RandolphStreetLP REALICofJacksonvillePlans,Inc ReksaDanaEastspringIDRFixedIncomeFund(NDEIFF) ReksaDanaEastspringInvestmentsCashReserve ReksaDanaEastspringInvestmentsIDRHighGrade ReksaDanaEastspringInvestmentsValueDiscovery ReksaDanaEastspringInvestmentsYieldDiscovery ReksaDanaSyariahEastspringSyariahEquityIslamicAsiaPacific USD ReksaDanaSyariahEastspringSyariahFixedIncomeAmanah ReksaDanaSyariahEastspringSyariahMoneyMarketKhazanah RhodiumInvestmentFund RiftGP1Limited RiftGP2Limited ROP,Inc SCBSETBankingSectorIndex(Accumulation) SchroderAsianInvestmentGradeCredit SchroderEmergingMarketsFund SchroderMulti-AssetRevolution SchroderUSDollarMoneyFund ScotAmPensionTrusteesLimited ScottishAmicableFinanceplc ScottishAmicableHoldingsLimited ScottishAmicableLifeAssuranceSociety Nosharecapital ScottishAmicablePensionsInvestmentsLimited ScottsSpazioPte.Ltd. Sealand(No1)Limited Sealand(No2)Limited SectordateLimited OS OS OS OS OS www.prudential.co.uk AnnualReport2018 Prudential plc 311 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationKey to classes of shares held LBG LPI MI NSB OS PI PS U LimitedbyGuarantee LimitedPartnershipInterest MembershipInterest Non-stockbasis OrdinaryShares PartnershipInterest PreferenceShares Units D6 Investments in subsidiary undertakings, joint ventures and associates continued (c) Related undertakings continued Other subsidiaries, joint ventures, associates and significant holdings of the Group (no shares held directly by the parent company, Prudential plc or its nominees) continued Name of entity SellyOakShoppingPark(GeneralPartner)Limited SellyOakShoppingPark(Nominee1)Limited SellyOakShoppingPark(Nominee2)Limited SellyOakShoppingParkLimitedPartnership SilverfleetCapital2004LP SilverfleetCapital2005LP SilverfleetCapital2006LP SilverfleetCapital2009LP SilverfleetCapital2011/12LP SilverfleetCapitalIIWPLF SmithfieldLimited SMLLC SquireCapitalILLC SquireCapitalIILLC SquireReassuranceCompanyII,Inc SquireReassuranceCompanyLLC SriHanSuriaSdn.Bhd. StEdwardHomesLimited StEdwardsStrandPartnership StableviewLimited StapleLimited StapleNomineesLimited ThanachartLongTermFixedIncome ThanachartLifeAssurancePublicCompanyLimited(Inliquidation) TheCarAuctionUnitTrust TheFirstBritishFixedTrustCompanyLimited TheGreenpark(Reading)LP TheHeightsManagementCompanyLimited ThePrudentialAssuranceCompanyLimited TheStEdwardHomesPartnership TheStrandPropertyUnitTrust TheTwoRiversTrust ThreeSnowhillBirminghamSARL TMBAssetManagementCo.,Ltd. TwoRiversLP TwoSnowhillBirminghamSARL UOBSmartGlobalHealthcare UOBSmartMillenniumGrowthFund VFLInternationalLifeCompanySPC,Ltd. WessexGateLimited(Inliquidation) WestwackerLimited WynnefieldPrivateEquityPartnersI,L.P. WynnefieldPrivateEquityPartnersII,L.P. Zenith-PrudentialLifeInsuranceCompanyLimited Classes of shares held Proportion held Registered office address and country of incorporation OS OS OS LPI LPI LPI LPI LPI LPI LPI OS LPI MI OS OS OS OS OS OS OS OS OS OS OS OS OS LPI OS OS OS LPI OS OS OS LPI OS OS OS OS OS OS LPI LPI OS 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 100.00% 100.00% 100.00% 1RoyalPlaza,StPetersPort,Guernsey,GY12HL 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 1209OrangeStreet,Wilmington,DE19801,USA 100.00% 1CorporateWay,Lansing,MI48951,USA 100.00% 100.00% 40600AnnArborRoad,EastSuite201,Plymouth,MI48170,USA 100.00% 1CorporateWay,Lansing,MI48951,USA 51.00% Suite1005,10thFloorWismaHamzah-KwongHing,No.1LebohAmpang,50100 KualaLumpur,Malaysia 50.00% BerkeleyHouse,19PortsmouthRoad,Surrey,KT111JG,UK 50.00% 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 3RajanakarnBuilding,20thFloor,SouthSathornRoad,YannawaSubdistrict, SathornDistrict,Bangkok,Thailand 100.00% LaurencePountneyHill,London,EC4R0HH,UK 27.79% 99.93% 231MBKLifeBuilding,5th-7thFloor,RajdamriRoad,Lumpini,Pathumwan, Bangkok10330,Thailand 9/9SathornBuilding,20th–27thFloor,SouthSathornRoad,Yannawa,Sahtorn, Bangkok10120,Thailand 50.00% DoreyCourt,AdmiralPark,St.PeterPort,GY12HT,Guernsey 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 50.00% 100.00% 49.95% BerkeleyHouse,19PortsmouthRoad,Surrey,KT111JG,UK 50.00% Libertehouse,19-23LaMotteStreet,StHelier,JE24SY,Jersey 50.00% 100.00% 5,rueGuilllaumeKroll,L-1882,Luxembourg 65.00% 32ndFL,AbdulrahimPlace,990RamaIVRd,Silom,Bangrak,Bangkok10500, Thailand 50.00% BowBellsHouse,1BreadStreet,London,EC4M9HH,UK 100.00% 5,rueGuilllaumeKroll,L-1882,Luxembourg 24.18% 33.18% 23A,25thFloor,AsiaCentreBuilding,173/27-30,32-33SouthSathonRoad, Thungmahamek,Sathon,Bangkok10120,Thailand 100.00% 171ElginAvenue,GrandCayman,CaymanIslands 100.00% LaurencePountneyHill,London,EC4R0HH,UK 100.00% 99.00% 1105NorthMarketStreet,Suite1300,Wilmington,DE19801,USA 99.00% 1209OrangeStreet,Wilmington,DE19801,USA 51.00% Plot280,AjoseAdeogunStreet,VictoriaIsland,Nigeria *PrudentialAssuranceMalaysiaBerhadisconsolidatedat100percentintheGroup’sfinancialstatementsreflectingtheeconomicinteresttotheGroup. †PrudentialBSNTakafulBerhadisajointventurethatisaccountedforusingtheequitymethod,forwhichtheGrouphasaneconomicinterestof70percentforallbusinesssoldupto 23December2016andof49percentfornewbusinesssoldsubsequenttothisdate. 312 Prudential plc AnnualReport2018 www.prudential.co.uk D Other notes continuedE Further accounting policies E1 Other significant accounting policies InadditiontothecriticalaccountingpolicespresentedinnoteA3.1,thefollowingdetailedaccountingpoliciesareadoptedbytheGroup topreparetheconsolidatedfinancialstatements.Theseaccountingpoliciesareappliedconsistentlyforallyearspresentedandnormally arenotsubjecttochangeunlessnewaccountingstandards,interpretationsoramendmentsareintroducedbytheIASB. (a) Basis of consolidation TheGroupconsolidatesthoseinvesteesitisdeemedtocontrol.TheGrouphascontroloveraninvesteeifallthreeofthefollowingare met:(1)ithaspoweroveraninvestee;(2)itisexposedto,orhasrightsto,variablereturnsfromitsinvolvementwiththeinvestee;and (3)ithasabilitytouseitspowerovertheinvesteetoaffectitsownreturns. (i) Subsidiaries SubsidiariesarethoseinvesteesthattheGroupcontrols.ThemajorityoftheGroup’ssubsidiariesarecorporateentities,buttheGroup’s insuranceoperationsalsoinvestinanumberoflimitedpartnerships. TheGroupperformsare-assessmentofconsolidationwheneverthereisachangeinthesubstanceoftherelationshipbetweenthe Groupandaninvestee.WheretheGroupisdeemedtocontrolanentityitistreatedasasubsidiaryanditsresults,assetsandliabilities areconsolidated.WheretheGroupholdsaminorityshareinanentity,withnocontrolovertheentity,theinvestmentsarecarriedatfair valuethroughprofitorlosswithinfinancialinvestmentsintheconsolidatedstatementoffinancialposition. EntitiesconsolidatedbytheGroupincludeQualifyingPartnershipsasdefinedundertheUKPartnerships(Accounts)Regulations 2008(the‘PartnershipsAct’).Someoftheselimitedpartnershipshavetakenadvantageoftheexemptionunderregulation7ofthe PartnershipsActfromthefinancialstatementsrequirements.Thisisunderregulations4to6,onthebasisthattheselimitedpartnerships aredealtwithonaconsolidatedbasisinthesefinancialstatements. (ii) Joint ventures and associates JointventuresarejointarrangementsarisingfromacontractualagreementwherebytheGroupandotherinvestorshavejointcontrolof thenetassetsofthearrangement.Inanumberofthesearrangements,theGroup’sshareoftheunderlyingnetassetsmaybelessthan 50percentbutthetermsoftherelevantagreementmakeitclearthatcontrolisjointlyexercisedbetweentheGroupandthethirdparty. AssociatesareentitiesoverwhichtheGrouphassignificantinfluence,butitdoesnotcontrol.GenerallyitispresumedthattheGrouphas significantinfluenceifitholdsbetween20percentand50percentvotingrightsoftheentity. Withtheexceptionofthosereferredtobelow,theGroupaccountsforitsinvestmentsinjointventuresandassociatesbyusingthe equitymethodofaccounting.TheGroup’sshareofprofitorlossofitsjointventuresandassociatesisrecognisedintheincomestatement anditsshareofmovementsinothercomprehensiveincomeisrecognisedinothercomprehensiveincome.Theequitymethodof accountingdoesnotapplytoinvestmentsinassociatesandjointventuresheldbytheGroup’sinsuranceorinvestmentfunds.This includesventurecapitalbusiness,mutualfundsandunittrustsandwhich,asallowedbyIAS28,‘InvestmentsinAssociatesandJoint Ventures’,arecarriedatfairvaluethroughprofitorloss. (iii) Structured entities Structuredentitiesarethosethathavebeendesignedsothatvotingorsimilarrightsarenotthedominantfactorindecidingwhocontrols theentity.Votingrightsrelatetoadministrativetasks.Relevantactivitiesaredirectedbymeansofcontractualarrangements.TheGroup investsinstructuredentitiessuchas: — Open-EndedInvestmentCompanies(OEICs); — UnitTrusts(UTs); — Limitedpartnerships; — Variableinterestentities; — Investmentvehicleswithinseparateaccountsofferedthroughvariableannuities; — Collateraliseddebtobligations; — Mortgage-backedsecurities;and — Similarasset-backedsecurities. www.prudential.co.uk AnnualReport2018 Prudential plc 313 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationE1 Other significant accounting policies continued (a) Basis of consolidation continued (iii) Structured entities continued Open-ended investment companies and unit trusts TheGroupinvestsinOEICsandUTs,whichinvestmainlyinequities,bonds,cashandcashequivalents,andproperties.TheGroup’s percentageownershipintheseentitiescanfluctuateonadailybasisaccordingtotheparticipationoftheGroupandotherinvestors inthem. — WheretheentityismanagedbyaGroupassetmanager,andtheGroup’sownershipholdingintheentityexceeds50percent,the Groupisjudgedtohavecontrolovertheentity. — WheretheentityismanagedbyaGroupassetmanager,andtheGroup’sownershipholdingintheentityisbetween20percentand 50percent,thefactsandcircumstancesoftheGroup’sinvolvementintheentityareconsidered,includingtherightstoanyfees earnedbytheassetmanagerfromtheentity,informingajudgementastowhethertheGrouphascontrolovertheentity. — WheretheentityismanagedbyaGroupassetmanager,andtheGroup’sownershipholdingintheentityislessthan20percent,the Groupisjudgedtonothavecontrolovertheentity. — WheretheentityismanagedbyanassetmanageroutsidetheGroup,anassessmentismadeofwhethertheGrouphasexistingrights thatgivesittheabilitytodirectthecurrentactivitiesoftheentityandthereforecontroltheentity.InassessingtheGroup’sabilityto directanentity,theGroupconsidersitsabilityrelativetootherinvestors.TheGrouphasalimitednumberofOEICsandUTswhereit considersithassuchability. WheretheGroupisdeemedtocontroltheseentities,theyaretreatedasasubsidiaryandareconsolidated,withtheinterestsofinvestors otherthantheGroupbeingclassifiedasliabilities,andappearasnetassetvalueattributabletounitholdersofconsolidatedunittrusts andsimilarfunds. WheretheGroupdoesnotcontroltheseentities(asitisdeemedtobeactingasanagent)andtheydonotmeetthedefinition ofassociates,theyarecarriedatfairvaluethroughprofitorlosswithinfinancialinvestmentsintheconsolidatedstatementof financialposition. WheretheGroup’sassetmanagersetsupOEICsandUTsaspartofassetmanagementoperations,theGroup’sinterestislimitedto theadministrationfeeschargedtomanagetheassetsofsuchentities.Withnoparticipationintheseentities,theGroupdoesnotretain risksassociatedwithOEICsandUTs.Fortheseopen-endedinvestmentcompaniesandunittrusts,theGroupisnotdeemedtocontrol theentitiesbuttobeactingasanagent. TheGroupgeneratesreturnsandretainstheownershiprisksininvestmentvehiclescommensuratetoitsparticipationanddoesnot haveanyfurtherexposuretotheresidualrisksoftheseinvestmentvehicles. Jackson’s separate account assets Theseareinvestmentvehiclesthatinvestcontractholders’premiumsinequity,fixedincome,bondsandmoneymarketmutualfunds. Thecontractholderretainstheunderlyingreturnsandtheownershiprisksrelatedtotheunderlyinginvestments.Theshareholder’s economicinterestinseparateaccountsislimitedtotheadministrativefeescharged.Theseparateaccountsaresetupasseparate regulatedentitiesgovernedbyaBoardofGovernorsortrusteesforwhichthemajorityofthemembersareindependentofJackson oranyaffiliatedentity.Theindependentmembersareresponsibleforanydecisionmakingthatimpactscontractholders’interest andgoverntheoperationalactivitiesoftheentities’advisers,includingassetmanagers.Accordingly,theGroupdoesnotcontrolthese vehicles.Theseinvestmentsarecarriedatfairvaluethroughprofitorlosswithinfinancialinvestmentsintheconsolidatedstatement offinancialposition. Limited partnerships TheGroup’sinsuranceoperationsinvestinanumberoflimitedpartnerships,eitherdirectlyorthroughunittrusts,throughamixof capitalandloans.Theselimitedpartnershipsaremanagedbygeneralpartners,inwhichtheGroupholdsequity.Suchinterestin generalpartnersandlimitedpartnershipsprovidetheGroupwithvotingandsimilarrightstoparticipateinthegovernanceframework oftherelevantactivitiesinwhichlimitedpartnershipsareengagedin.Accountingforthelimitedpartnershipsassubsidiaries,joint ventures,associatesorotherfinancialinvestmentsdependsonthetermsofeachpartnershipagreementandtheshareholdingsinthe generalpartners. 314 Prudential plc AnnualReport2018 www.prudential.co.uk E Further accounting policies continuedOther structured entities TheGroupholdsinvestmentsinmortgage-backedsecurities,collateraliseddebtobligationsandsimilarasset-backedsecurities,the majorityofwhichareactivelytradedinaliquidmarket. TheGroupconsolidatesthevehiclesthatholdtheinvestmentswheretheGroupisdeemedtocontrolthevehicles.Whenassessing controloverthevehicles,thefactorsconsideredincludethepurposeanddesignofthevehicle,theGroup’sexposuretothevariability ofreturnsandthescopeoftheGroup’sabilitytodirecttherelevantactivitiesofthevehicleincludinganykick-outorremovalrights thatareheldbythirdparties.Theoutcomeofthecontrolassessmentisdependentonthetermsandconditionsoftherespective individualarrangements. Themajorityofsuchvehiclesarenotconsolidated.InthesecasestheGroupisnotthesponsorofthevehiclesinwhichitholds investmentsandhasnoadministrativerightsoverthevehicles’activities.TheGroupgeneratesreturnsandretainstheownership riskscommensuratetoitsholdinganditsexposuretotheinvestments.AccordinglytheGroupdoesnothavepowerovertherelevant activitiesofsuchvehiclesandallarecarriedatfairvaluethroughprofitorlosswithinfinancialinvestmentsintheconsolidatedstatement offinancialposition. Thetablebelowprovidesaggregatecarryingamountsoftheinvestmentsinunconsolidatedstructuredentitiesreportedinthe Group’sstatementoffinancialposition: 31 December 2018 £m 31 December 2017 £m OEICs/UTs Separate account assets Other structured entities OEICs/UTs Separate account assets Other structured entities Statement of financial position line items Equitysecuritiesandportfolioholdingsinunit trusts Debtsecurities Total 21,216 – 21,216 128,220 – 128,220 – 11,081 11,081 20,718 – 20,718 130,528 – 130,528 – 10,894 10,894 TheGroupgeneratesreturnsandretainstheownershiprisksintheseinvestmentscommensuratetoitsparticipationanddoesnothave anyfurtherexposuretotheresidualrisksorlossesoftheinvestmentsorthevehiclesinwhichitholdsinvestments. Asat31December2018,theGroupdoesnothaveanagreement,contractualorotherwise,orintentiontoprovidefinancialsupport tostructuredentitiesthatcouldexposetheGrouptoaloss. (b) Reinsurance Themeasurementofreinsuranceassetsisconsistentwiththemeasurementoftheunderlyingdirectinsurancecontracts.Thetreatment ofanygainsorlossesarisingonthepurchaseofreinsurancecontractsisdependentontheunderlyingaccountingbasisoftheentity concerned. (c) Earned premiums, policy fees and claims paid Premiumsforconventionalwith-profitspoliciesandotherprotectiontypeinsurancepoliciesarerecognisedasrevenuewhendue. Premiumsandannuityconsiderationsforlinkedpolicies,unitisedwith-profitsandotherinvestmenttypepoliciesarerecognisedas revenuewhenreceivedor,inthecaseofunitisedorunit-linkedpolicies,whenunitsareissued.Theseamountsexcludepremiumtaxes andsimilardutieswherePrudentialcollectsandsettlestaxesbornebythecustomer. Policyfeeschargedonlinkedandunitisedwith-profitspoliciesformortality,assetmanagementandpolicyadministrationare recognisedasrevenuewhenrelatedservicesareprovided. Claimspaidincludematurities,annuities,surrendersanddeaths.Maturityclaimsarerecordedaschargesonthepolicymaturitydate. Annuityclaimsarerecordedwheneachannuityinstalmentbecomesdueforpayment.Surrendersarechargedtotheincomestatement whenpaidanddeathclaimsarerecordedwhennotified. (d) Investment return Investmentreturnincludedintheincomestatementprincipallycomprisesinterestincome,dividends,investmentappreciation/ depreciation(realisedandunrealisedgainsandlosses)oninvestmentsdesignatedasfairvaluethroughprofitorloss,andrealisedgains andlosses(includingimpairmentlosses)onitemsheldatamortisedcostandJackson’sdebtsecuritiesdesignatedasavailable-for-sale. Movementsinunrealisedappreciation/depreciationofJackson’sdebtsecuritiesdesignatedasavailable-for-salearerecordedinother comprehensiveincome.Interestincomeisrecognisedasitaccrues,takingintoaccounttheeffectiveyieldoninvestments.Dividendson equitysecuritiesarerecognisedontheex-dividenddateandrentalincomeisrecognisedonanaccrualbasis. www.prudential.co.uk AnnualReport2018 Prudential plc 315 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationE1 Other significant accounting policies continued (e) Financial investments other than instruments classified as long-term business contracts (i) Investment classification TheGroupholdsfinancialinvestmentsinaccordancewithIAS39,wherebysubjecttospecificcriteria,financialinstrumentsarerequired tobeaccountedforunderoneofthefollowingcategories: — Financialassetsandliabilitiesatfairvaluethroughprofitorloss–thiscomprisesassetsandliabilitiesdesignatedbymanagementas fairvaluethroughprofitorlossoninceptionandderivativesthatareheldfortrading.Theseinvestmentsaremeasuredatfairvalue withallchangesthereonbeingrecognisedininvestmentreturnintheincomestatement; — Financialinvestmentsonanavailable-for-salebasis–thiscomprisesassetsthataredesignatedbymanagementasavailable-for-sale and/ordonotfallintoanyoftheothercategories.Theseassetsareinitiallyrecognisedatfairvalueplusattributabletransactioncosts. Available-for-saleassetsaresubsequentlymeasuredatfairvalue.Interestincomeisrecognisedonaneffectiveinterestbasisinthe incomestatement.Theeffectiveinterestrateistheratethatexactlydiscountsestimatedfuturecashreceiptsthroughtheexpected lifeofthefinancialinstrumentor,whenappropriate,ashorterperiodtothenetcarryingamountofthefinancialasset.Exceptfor foreignexchangegainsandlossesondebtsecurities,whichareincludedintheincomestatement,unrealisedgainsandlossesare recognisedinothercomprehensiveincome.Upondisposalorimpairment,accumulatedunrealisedgainsandlossesaretransferred fromothercomprehensiveincometotheincomestatementasrealisedgainsorlosses;and — Loansandreceivables–exceptforthosedesignatedasatfairvaluethroughprofitorlossoravailable-for-sale,theseinstruments comprisenon-quotedinvestmentsthathavefixedordeterminablepayments.Theseinstrumentsincludeloanscollateralisedby mortgages,deposits,loanstopolicyholdersandotherunsecuredloansandreceivables.Theseinvestmentsareinitiallyrecognisedat fairvalueplustransactioncosts.Subsequently,theseinstrumentsarecarriedatamortisedcostusingtheeffectiveinterestmethod. TheGroupusesthetradedatemethodtoaccountforregularpurchasesandsalesoffinancialassets.SeenoteA3.1forfurtherdetailsof valuationoffinancialinvestments. (ii) Derivatives and hedge accounting Derivativefinancialinstrumentsareusedtoreduceormanageinvestment,interestrateandcurrencyexposures,tofacilitateefficient portfoliomanagementandforinvestmentpurposes. TheGroupmaydesignatecertainderivativesashedges. Forhedgesofnetinvestmentsinforeignoperations,theeffectiveportionofanychangeinfairvalueofderivativesorotherfinancial instrumentsdesignatedasnetinvestmenthedgesisrecognisedinothercomprehensiveincome.Theineffectiveportionofchangesin thefairvalueofthehedginginstrumentisrecordedintheincomestatement. TheGroupdoesnotregularlyseektoapplyfairvalueorcashflowhedgingtreatmentunderIAS39.TheGrouphasnofairvalueand cashflowshedgesunderIAS39at31December2018and2017. Allderivativesthatarenotdesignatedashedginginstrumentsarecarriedatfairvalue,withmovementsinfairvaluebeingrecordedin theincomestatement. TheprimaryareasoftheGroup’scontinuingoperationswherederivativeinstrumentsareheldaretheUKwith-profitsfundsand annuitybusinessandJackson. ForUKwith-profitsfundsthederivativeprogrammeisusedforthepurposesofefficientportfoliomanagementorreductionin investmentrisk. Forshareholder-backedUKannuitybusinessthederivativesareheldtocontributetothematchingasfaraspractical,ofassetreturns anddurationwiththoseofliabilitiestopolicyholders.Thecarryingvalueoftheseliabilitiesissensitivetothereturnonthematching financialassetsincludingderivativesheld. ForJackson’sderivativeprogrammeseenoteA3.1. (iii) Guaranteed benefit options and embedded derivatives Jackson’svariableannuityproductswithguaranteedbenefitoptionsarewithinthescopeofIFRS4andareaccountedforusing ‘grandfathered’USGAAP(SeeC4.2(b)).ThisresultsinliabilitiesforGuaranteedMinimumWithdrawalBenefit(‘notforlife’)and GuaranteedMinimumAccumulationbenefitoptionsbeingbifurcatedandmeasuredatfairvalueinamannerconsistentwithIAS39. Embeddedderivativesareembeddedwithinothernon-derivativehostfinancialinstrumentsandinsurancecontractstocreatehybrid instruments.EmbeddedderivativesmeetingthedefinitionofaninsurancecontractareaccountedforunderIFRS4.Whereeconomic characteristicsandrisksoftheembeddedderivativesarenotcloselyrelatedtotheeconomiccharacteristicsandrisksofthehost instrument,andwherethehybridinstrumentisnotmeasuredatfairvaluewiththechangesinfairvaluerecognisedintheincome statement,theembeddedderivativeisbifurcatedandcarriedatfairvalueasaderivativemeasuredinaccordancewithIAS39. Inaddition,theGroupappliestheoptionunderIFRS4tonotseparateandfairvaluesurrenderoptionsembeddedinhostcontracts andwith-profitsinvestmentcontractswhosestrikepriceiseitherafixedamountorafixedamountplusinterest. (iv) Securities lending and reverse repurchase agreements TheGroupispartytovarioussecuritieslendingagreements(includingrepurchaseagreements)underwhichsecuritiesareloanedto thirdpartiesonashort-termbasis.Theloanedsecuritiesarenotderecognised;rather,theycontinuetoberecognisedwithinthe appropriateinvestmentclassification.TheGroup’spolicyisthatcollateralinexcessof100percentofthefairvalueofsecuritiesloanedis requiredfromallsecurities’borrowersandtypicallyconsistsofcash,debtsecurities,equitysecuritiesorlettersofcredit. 316 Prudential plc AnnualReport2018 www.prudential.co.uk E Further accounting policies continuedIncaseswheretheGrouptakespossessionofthecollateralunderitssecuritieslendingprogramme,thecollateral,andcorresponding obligationtoreturnsuchcollateral,arerecognisedintheconsolidatedstatementoffinancialposition. TheGroupisalsopartytovariousreverserepurchaseagreementsunderwhichsecuritiesarepurchasedfromthirdpartieswithan obligationtoresellthesecurities.Thesecuritiesarenotrecognisedasinvestmentsinthestatementoffinancialposition. (v) Derecognition of financial assets and liabilities TheGroup’spolicyistoderecognisefinancialassetswhenitisdeemedthatsubstantiallyalltherisksandrewardsofownershiphave beentransferred. TheGroupderecognisesfinancialliabilitiesonlywhentheobligationspecifiedinthecontractisdischarged,cancelledorhasexpired. (vi) Financial liabilities designated at fair value through profit or loss ConsistentwiththeGroup’sriskmanagementandinvestmentstrategyandthenatureoftheproductsconcerned,theGrouphas designatedunderIAS39classificationcertainfinancialliabilitiesatfairvaluethroughprofitorlossastheseinstrumentsaremanaged andtheirperformanceevaluatedonafairvaluebasis.Theseinstrumentsincludeliabilitiesrelatedtoconsolidatedcollateraliseddebt obligations,netassetsattributabletounitholdersofconsolidatedunittrustsandsimilarfundsandpolicyholderliabilitiesforinvestment contractswithoutdiscretionaryparticipationfeaturesforUKandAsia. (f) Segments UnderIFRS8,‘OperatingSegments’,theGroupdeterminesandpresentsoperatingsegmentsbasedontheinformationthatisinternally providedtotheGroupExecutiveCommitteewhichistheGroup’schiefoperatingdecisionmaker. TheoperatingsegmentsidentifiedbytheGroupreflecttheGroup’sorganisationalstructure,whichisbybusinessunitsAsia,USand UKandEurope.Allbusinessunitscontainbothinsuranceandassetmanagementoperations. FurtherinformationontheGroup’soperatingsegmentsisprovidedinnoteB1.3. (g) Borrowings Althoughinitiallyrecognisedatfairvalue,netoftransactioncosts,borrowings,excludingliabilitiesofconsolidatedcollateraliseddebt obligations,aresubsequentlyaccountedforonanamortisedcostbasisusingtheeffectiveinterestmethod.Undertheeffectiveinterest method,thedifferencebetweentheredemptionvalueoftheborrowingandtheinitialproceeds(netofrelatedissuecosts)isamortised throughtheincomestatementtothedateofmaturityorforhybriddebt,overtheexpectedlifeoftheinstrument. (h) Investment properties InvestmentsinleaseholdandfreeholdpropertiesnotforoccupationbytheGroup,includingpropertiesunderdevelopmentforfuture useasinvestmentproperties,arecarriedatfairvalue,withchangesinfairvalueincludedintheincomestatement.Propertiesarevalued annuallyeitherbytheGroup’squalifiedsurveyorsorbytakingintoconsiderationtheadviceofprofessionalexternalvaluersusingthe RoyalInstitutionofCharteredSurveyorsvaluationstandards.Eachpropertyisexternallyvaluedatleastonceeverythreeyears. LeasesofinvestmentpropertywheretheGrouphassubstantiallyalltherisksandrewardsofownershipareclassifiedasfinanceleases (leaseholdproperty).Financeleasesarecapitalisedatthelease’sinceptionatthelowerofthefairvalueoftheleasedpropertyandthe presentvalueoftheminimumleasepayments. (i) Pension schemes FortheGroup’sdefinedbenefitschemes,ifthepresentvalueofthedefinedbenefitobligationexceedsthefairvalueofthescheme assets,thenaliabilityisrecordedintheGroup’sstatementoffinancialposition.Bycontrast,ifthefairvalueoftheassetsexceedsthe presentvalueofthedefinedbenefitobligationthenthesurpluswillonlyberecognisedifthenatureofthearrangementsunderthetrust deed,andfundingarrangementsbetweentheTrusteeandtheCompany,supporttheavailabilityofrefundsorrecoverabilitythrough agreedreductionsinfuturecontributions.Inaddition,ifthereisaconstructiveobligationfortheCompanytopaydeficitfunding,thisis alsorecognisedsuchthatthefinancialpositionrecordedfortheschemereflectsthehigherofanyunderlyingIAS19deficitandthe obligationfordeficitfunding. TheGrouputilisestheprojectedunitcreditmethodtocalculatethedefinedbenefitobligation.Thismethodseeseachperiodof serviceasgivingrisetoanadditionalunitofbenefitentitlementandmeasureseachunitseparatelytobuildupthefinalobligation. Estimatedfuturecashflowsarethendiscountedatahigh-qualitycorporatebondrate,adjustedtoallowforthedifferenceinduration betweenthebondindexandthepensionliabilitieswhereappropriate,todetermineitspresentvalue.Thesecalculationsareperformed byindependentactuaries. TheplanassetsoftheGroup’spensionschemesincludeseveralinsurancecontractsthathavebeenissuedbytheGroup. Theseassetsareexcludedfromplanassetsindeterminingthepensionsurplusordeficitrecognisedintheconsolidatedstatementof financialposition. Theaggregateoftheactuariallydeterminedservicecostsofthecurrentlyemployedpersonnel,andthenetinterestonthenetdefined benefitliability(asset)atthestartoftheperiod,ischargedtotheincomestatement.Actuarialandothergainsandlossesasaresultof changesinassumptionsorexperiencevariancesarerecognisedasothercomprehensiveincome. ContributionstotheGroup’sdefinedcontributionschemesareexpensedwhendue. www.prudential.co.uk AnnualReport2018 Prudential plc 317 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationE1 Other significant accounting policies continued (j) Share-based payments and related movements in own shares TheGroupoffersshareawardandoptionplansforcertainkeyemployeesandaSaveAsYouEarnplanforallUKandcertainoverseas employees.Sharesheldintrustrelatingtotheseplansareconditionallygiftedtoemployees. Thecompensationexpensechargedtotheincomestatementisprimarilybaseduponthefairvalueoftheoptionsgranted,thevesting periodandthevestingconditions. TheCompanyhasestablishedtruststofacilitatethedeliveryofPrudentialplcsharesunderemployeeincentiveplansandsavings- relatedshareoptionschemes.ThecosttotheCompanyofacquiringthesetreasurysharesheldintrustsisshownasadeductionfrom shareholders’equity. (k) Tax Prudentialissubjecttotaxinnumerousjurisdictionsandthecalculationofthetotaltaxchargeinherentlyinvolvesadegreeofestimation andjudgement.Currenttaxexpenseischargedorcreditedbaseduponamountsestimatedtobepayableorrecoverableasaresultof taxableamountsforthecurrentyearandadjustmentsmadeinrelationtoprioryears.Thepositionstakenintaxreturnswhereapplicable taxregulationissubjecttointerpretationarerecognisedinfullinthedeterminationofthetaxchargeinthefinancialstatementsifthe Groupconsidersthatitisprobablethatthetaxationauthoritywillacceptthosepositions.Otherwise,provisionsareestablishedbasedon management’sestimateandjudgementofthelikelyamountoftheliability,orrecoverybyprovidingforthesinglebestestimateofthe mostlikelyoutcomeortheweightedaverageexpectedvaluewheretherearemultipleoutcomes. Thetotaltaxchargeincludestaxexpenseattributabletobothpolicyholdersandshareholders.Thetaxexpenseattributableto policyholderscomprisesthetaxontheincomeoftheconsolidatedwith-profitsandunit-linkedfunds.Incertainjurisdictions,suchasthe UK,lifeinsurancecompaniesaretaxedonboththeirshareholders’profitsandontheirpolicyholders’insuranceandinvestmentreturns oncertaininsuranceandinvestmentproducts.AlthoughbothtypesoftaxareincludedinthetotaltaxchargeintheGroup’sconsolidated incomestatement,theyarepresentedseparatelyintheconsolidatedincomestatementtoprovidethemostrelevantinformationabout taxthattheGrouppaysonitsprofits. Deferredtaxesareprovidedundertheliabilitymethodforallrelevanttemporarydifferences.IAS12,‘IncomeTaxes’doesnotrequire alltemporarydifferencestobeprovidedfor,inparticular,theGroupdoesnotprovidefordeferredtaxonundistributedearningsof subsidiarieswheretheGroupisabletocontrolthetimingofthedistributionandthetemporarydifferencecreatedisnotexpectedto reverseintheforeseeablefuture.Deferredtaxassetsareonlyrecognisedwhenitismorelikelythannotthatfuturetaxableprofitswillbe availableagainstwhichtheselossescanbeutilised. Deferredtaxismeasuredatthetaxratesthatareexpectedtoapplytotheperiodwhentheassetisrealisedortheliabilitysettled, basedontaxrates(andlaws)thathavebeenenactedoraresubstantivelyenactedattheendofthereportingperiod. (l) Business acquisitions and disposals Businessacquisitionsareaccountedforbyapplyingthepurchasemethodofaccounting,whichadjuststhenetassetsoftheacquired companytofairvalueatthedateofpurchase.Theexcessoftheacquisitionconsiderationoverthefairvalueoftheassetsandliabilities oftheacquiredentityisrecordedasgoodwill.Expensesrelatedtoacquiringnewsubsidiariesarechargedtotheincomestatementin theperiodinwhichtheyareincurred.Incomeandexpensesofacquiredentitiesareincludedintheincomestatementfromthedate ofacquisition. Incomeandexpensesofentitiessoldduringtheperiodareincludedintheincomestatementuptothedateofdisposal.Thegainor lossondisposaliscalculatedasthedifferencebetweensaleproceedsnetofsellingcosts,lessthenetassetsoftheentityatthedateof disposal,adjustedforforeignexchangemovementsattachingtothesoldentitythatarerequiredtoberecycledtotheincomestatement underIAS21. WheretheGroupwritesaputoptionoveritsnon-controllinginterestsaspartofitsbusinessacquisition,whichifexercisedtriggers thepurchasebytheGroupofthenon-controllinginterests,theputoptionisrecognisedasafinancialliabilityattheacquisitiondatewith acorrespondingamount,deducteddirectlyfromshareholder’sequity.Anysubsequentchangestothecarryingamountoftheput liabilityarealsorecognisedwithinequity. (m) Goodwill GoodwillarisingonacquisitionsofsubsidiariesandbusinessesiscapitalisedandcarriedontheGroupstatementoffinancialpositionas anintangibleassetatinitialvaluelessanyaccumulatedimpairmentlosses.Goodwillimpairmenttestingisconductedannuallyandwhen thereisanindicationofimpairment.Forthepurposesofimpairmenttesting,goodwillisallocatedtocashgeneratingunits.Forfurther detailsseenoteC5.1. 318 Prudential plc AnnualReport2018 www.prudential.co.uk E Further accounting policies continued(n) Intangible assets Intangibleassetsacquiredonthepurchaseofasubsidiaryorportfolioofcontractsaremeasuredatfairvalueonacquisition.Deferred acquisitioncostsareaccountedforasdescribedinnoteA3.1(c).Otherintangibleassets,suchasdistributionrightsandsoftware,are valuedinitiallyatthepricepaidtoacquirethemandaresubsequentlycarriedatcostlessamortisationandanyaccumulatedimpairment losses.TheamortisationmethodsfordistributionrightsandsoftwareareasdescribedinnoteC5.2(iii).Forotherintangibles, amortisationfollowsthepatterninwhichthefutureeconomicbenefitsareexpectedtobeconsumed.Ifthepatterncannotbe determinedreliably,astraight-linemethodisapplied.Amortisationofintangibleassetsischargedtothe‘acquisitioncostsandother expenditure’lineintheconsolidatedincomestatement.Impairmenttestingisconductedwhenthereisanindicationofimpairment. (o) Cash and cash equivalents Cashandcashequivalentsconsistofcashatbankandinhand,depositsheldatcallwithbanks,treasurybillsandothershort-termhighly liquidinvestmentswithlessthan90daysmaturityfromthedateofacquisition. (p) Shareholders’ dividends Interimdividendsarerecordedintheperiodinwhichtheyarepaid.Finaldividendsarerecordedintheperiodinwhichtheyareapproved byshareholders. (q) Share capital Sharesareclassifiedasequitywhentheirtermsdonotcreateanobligationtotransferassets.Thedifferencebetweentheproceeds receivedonissueoftheshares,netofshareissuecosts,andthenominalvalueofthesharesissued,iscreditedtosharepremium.Where theCompanypurchasessharesforthepurposesofemployeeincentiveplans,theconsiderationpaid,netofissuecosts,isdeductedfrom retainedearnings.Uponissueorsaleanyconsiderationreceivediscreditedtoretainedearningsnetofrelatedcosts. (r) Foreign exchange TheGroup’sconsolidatedfinancialstatementsarepresentedinpoundssterling,theGroup’spresentationcurrency.Accordingly,the resultsandfinancialpositionofforeignsubsidiariesmustbetranslatedintothepresentationcurrencyoftheGroupfromtheirfunctional currencies,iethecurrencyoftheprimaryeconomicenvironmentinwhichtheentityoperates.Allassetsandliabilitiesofforeign subsidiariesareconvertedatyearendexchangerateswhileallincomeandexpensesareconvertedataverageexchangerateswhere thisisareasonableapproximationoftheratesprevailingontransactiondates.Theimpactofthesecurrencytranslationsisrecorded asaseparatecomponentinthestatementofcomprehensiveincome. ForeigncurrencyborrowingsthatareusedtoprovideahedgeagainstGroupequityinvestmentsinoverseassubsidiariesare translatedatyearendexchangeratesandmovementsrecognisedinothercomprehensiveincome.Otherforeigncurrencymonetary itemsaretranslatedatyearendexchangerateswithchangesrecognisedintheincomestatement. Foreigncurrencytransactionsaretranslatedatthespotrateprevailingatthetime. (s) Earnings per share Basicearningspershareiscalculatedbydividingtheearningsattributabletoordinaryshareholdersbytheweightedaveragenumber ofordinarysharesoutstandingduringtheyear,excludingthoseheldinemployeesharetrustsandconsolidatedunittrustsandOEICs, whicharetreatedascancelled. Fordilutedearningspershare,theweightedaveragenumberofsharesinissueisadjustedtoassumeconversionofalldilutive potentialordinaryshares.TheGroup’sonlyclassofpotentiallydilutiveordinarysharesarethoseshareoptionsgrantedtoemployees wheretheexercisepriceislessthantheaveragemarketpriceoftheCompany’sordinarysharesduringtheyear.Noadjustmentismade iftheimpactisanti-dilutiveoverall. www.prudential.co.uk AnnualReport2018 Prudential plc 319 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationStatement of financial position of the parent company 31 December Fixed assets Investments in subsidiary undertakings Current assets Debtors: Amounts owed by subsidiary undertakings Other debtors Tax recoverable Derivative assets Pension asset   Cash at bank and in hand Liabilities: amounts falling due within one year Commercial paper Other borrowings Derivative liabilities Amounts owed to subsidiary undertakings Tax payable Deferred tax liability Accruals and deferred income Net current assets Total assets less current liabilities Liabilities: amounts falling due after more than one year Subordinated liabilities Debenture loans Other borrowings Total net assets Capital and reserves Share capital Share premium Profit and loss account Shareholders’ funds Profit for the year Note 2018  £m 2017  £m 5 6 7 8 8 6 9 8 8 8 10 10 11 10,825 10,798 5,904 5 42 5 69 22 6,047 (472) – (423) (936) (10) (12) (101) 4,732 5 40 5 71 143 4,996 (485) (600) (443) (715) (10) (12) (79) (1,954) (2,344) 4,093 14,918 (6,676) (517) (275) (7,468) 7,450 130 1,964 5,356 7,450 2,652 13,450 (5,272) (549) – (5,821) 7,629 129 1,948 5,552 7,629 2018  £m 2017  £m 1,041 1,235 The financial statements of the parent company on pages 320 to 328 were approved by the Board of Directors on  12 March 2019 and signed on its behalf. Paul Manduca Chairman Mike Wells Group Chief Executive Mark FitzPatrick Chief Financial Officer 320  Prudential plc  Annual Report 2018  www.prudential.co.uk Statement of changes in equity of the parent company £m Balance at 1 January 2017 Share capital 129 Share premium Profit and loss account 1,927 5,449 Total comprehensive income for the year Profit for the year Actuarial gains recognised in respect of the defined benefit pension scheme Total comprehensive income for the year Transactions with owners, recorded directly in equity New share capital subscribed Share based payment transactions  Dividends Total contributions by and distributions to owners Balance at 31 December 2017 Balance at 1 January 2018 Impact of initial application of IFRS 9 Total comprehensive income for the year Profit for the year Actuarial gains recognised in respect of the defined benefit pension scheme Total comprehensive income for the year Transactions with owners, recorded directly in equity New share capital subscribed Share based payment transactions  Dividends Total contributions by and distributions to owners – – – – – – – 129 129 – – – – 1 – – 1 – – – 21 – – 21 1,948 1,948 – – – – 16 – – 16 Balance at 31 December 2018 130 1,964 1,235 28 1,263 – (1) (1,159) (1,160) 5,552 5,552 (9) 1,041 16 1,057 – – (1,244) (1,244) 5,356 Total equity 7,505 1,235 28 1,263 21 (1) (1,159) (1,139) 7,629 7,629 (9) 1,041 16 1,057 17 – (1,244) (1,227) 7,450 www.prudential.co.uk  Annual Report 2018  Prudential plc  321 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the parent company financial statements 1 Nature of operations Prudential plc (the Company) is a parent holding company. The Company together with its subsidiaries (collectively, the Group) is an  international financial services group with its operations in Asia, the US, UK and Europe and Africa. The Group offers a wide range of  retail financial products and services and asset management services throughout these operations. The retail financial products and  services primarily include life insurance, pensions and annuities as well as collective investment schemes. On 14 March 2018, the  Company announced its intention to demerge M&GPrudential, its UK and Europe business, from Prudential plc resulting in two  separately listed companies. 2 Basis of preparation The financial statements of the Company, which comprise the statement of financial position, statement of changes in equity and related  notes, are prepared in accordance with UK Generally Accepted Accounting Practice, including Financial Reporting Standard 101  Reduced Disclosure Framework (‘FRS 101’) and Part 15 of the Companies Act 2006. In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements in  International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (‘IASB’) and endorsed  by the EU, but makes amendments where necessary in order to comply with the Companies Act 2006 and has set out below where  advantage of the FRS 101 disclosure exemptions has been taken. The Company has also taken advantage of the exemption under  Section 408 of the Companies Act 2006 from presenting its own profit and loss account. In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures:   — A cash flow statement and related notes;   — Disclosures in respect of transactions with wholly-owned subsidiaries within the Prudential Group;  — Disclosure in respect of capital management; and  — The effects of new but not yet effective IFRSs. As the consolidated financial statements of the Group include the equivalent disclosures, the Company has also applied the exemptions  available under FRS 101 in respect of the following disclosures:  — IFRS 2 ‘Share Based Payments’ in respect of Group-settled share-based payments;   — Disclosure required by IFRS 7 ‘Financial Instrument Disclosures’ and IFRS 13 ‘Fair Value Measurement’, except for the consequential  amendments to IFRS 7 related to IFRS 9 which have not been adopted by the Group; and  — IFRS 15, ‘Revenue from Contracts with Customers’ in respect of revenue recognition. In 2018, the Company adopted IFRS 9, ‘Financial Instruments’ which replaced IAS 39, ‘Financial Instruments – Recognition and  Measurement’. Under IFRS 9, except for derivative instruments that are mandatorily classified as fair value through profit or loss, all of  the financial assets and liabilities of the Company are classified as amortised cost. There was no significant change from previous IAS 39  classification. The Company changed its approach to assessing impairment on its loans and receivables from the IAS 39 incurred loss  approach to the IFRS 9 expected credit loss approach. This resulted in a small amount of expected credit losses (£9 million) recognised in  retained earnings as at 1 January 2018, the date of initial application relating to the amounts owed by subsidiary undertakings (£14 million  at 31 December 2018). As permitted by IFRS 9, the Company has not restated its 2017 comparatives. The expected credit loss on the  Company’s loans and receivables, the majority of which represent loans to its subsidiaries, have been assessed by taking into account the  probability of default on those loans. In all cases the subsidiaries are expected to have sufficient resources to repay the loan either now or  over time (based on projected earnings). The expected credit loss has therefore been limited to the impact of discounting the value of the  loan between the balance sheet date and the anticipated recovery date. The expected credit loss in the period was a charge of £5 million. The Company has also adopted IFRS 15, ‘Revenue from Contracts with Customers’ and Amendments to IFRS 2, ‘Share-based  Payments’ as applied under FRS 101 in 2018, the adoption of which did not have an impact on the financial statements of the Company.  The accounting policies set out in note 3 below have, unless otherwise stated, been applied consistently to all periods presented in  these financial statements. 3 Significant accounting policies Investments in subsidiary undertakings Investments in subsidiary undertakings are shown at cost less impairment. Amounts owed by subsidiary undertakings Amounts owed by subsidiary undertakings are shown at cost, less provisions. Upon the adoption of IFRS 9 in 2018, the provisions  are determined using the expected credit loss approach.  Derivatives Derivative financial instruments are held to manage certain macro-economic exposures. Derivative financial instruments are carried  at fair value with changes in fair value included in the profit and loss account. 322  Prudential plc  Annual Report 2018  www.prudential.co.uk Borrowings Borrowings are initially recognised at fair value, net of transaction costs, and subsequently accounted for on an amortised cost basis using  the effective interest method. Under the effective interest method, the difference between the redemption value of the borrowing and  the initial proceeds, net of transaction costs, is amortised through the profit and loss account to the date of maturity or, for subordinated  debt, over the expected life of the instrument. Where modifications to borrowings do not result in a substantial difference to the terms of  the instrument, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining expected life of  the modified instrument. Dividends Interim dividends are recorded in the period in which they are paid.  Share premium The difference between the proceeds received on issue of shares and the nominal value of the shares issued is credited to the share  premium account. Foreign currency translation Assets and liabilities denominated in foreign currencies, including borrowings that have been used to finance or provide a hedge against  Group equity investments in overseas subsidiaries, are translated at year end exchange rates. The impact of these currency translations  is recorded within the profit and loss account for the year. Tax Current tax expense is charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of  taxable amounts for the current year. To the extent that losses of an individual UK company are not offset in any one year, they can  be carried back for one year or carried forward indefinitely to be offset against profits arising from the same company. Deferred tax assets and liabilities are recognised in accordance with the provisions of IAS 12, ’Income Taxes’. Deferred tax assets are  recognised to the extent that it is regarded as more likely than not that future taxable profits will be available against which these losses  can be utilised. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse,  using tax rates enacted or substantively enacted at the reporting date. The Group’s UK subsidiaries each file separate tax returns. In accordance with UK tax legislation, where one domestic UK company  is a 75 per cent owned subsidiary of another UK company or both are 75 per cent owned subsidiaries of a common parent, the companies  are considered to be within the same UK tax group. For companies within the same tax group, trading profits and losses arising in the  same accounting period may be offset for the purposes of determining current and deferred taxes. Pensions The Company assumes a portion of the pension surplus or deficit of the Group’s main pension scheme, the Prudential Staff Pension  Scheme (‘PSPS’). The Company applies the requirements of IAS 19 ‘Employee Benefits’ (as revised in 2011) for the accounting of its  interest in the PSPS surplus or deficit. Further details are disclosed in note 7. A pension surplus or deficit is recorded as the difference between the present value of the scheme liabilities and the fair value of the  scheme assets. The Company’s share of pension surplus is recognised to the extent that the Company is able to recover a surplus either  through reduced contributions in the future or through refunds from the scheme.  The assets and liabilities of the defined benefit pension schemes of the Prudential Group are subject to a full triennial actuarial  valuation using the projected unit method. Estimated future cash flows are then discounted at a high quality corporate bond yield,  adjusted to allow for the difference in duration between the bond index and the pension liabilities, where appropriate, to determine their  present value. These calculations are performed by independent actuaries. The aggregate of the actuarially determined service costs of the currently employed personnel and the net income (interest) on the  net scheme assets (liabilities) at the start of the period, is recognised in the profit or loss account. Actuarial gains and losses as a result of  the changes in assumptions, experience variances or the return on scheme assets excluding amounts included in the net deferred benefit  asset (liability) are recorded in other comprehensive income. Share-based payments The Group offers share award and option plans for certain key employees and a Save As You Earn (‘SAYE’) plan for all UK and certain  overseas employees. The share-based payment plans operated by the Group are mainly equity-settled. Under IFRS 2 ‘Share-based payment’, where the Company, as the parent company, has the obligation to settle the options or awards  of its equity instruments to employees of its subsidiary undertakings, and such share-based payments are accounted for as equity-settled  in the Group financial statements, the Company records an increase in the investment in subsidiary undertakings for the value of the  share options and awards granted with a corresponding credit entry recognised directly in equity. The value of the share options and  awards granted is based upon the fair value of the options and awards at the grant date, the vesting period and the vesting conditions. www.prudential.co.uk  Annual Report 2018  Prudential plc  323 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information4 Reconciliation from the FRS 101 parent company results to the IFRS Group results The parent company financial statements are prepared in accordance with FRS 101 and the Group financial statements are prepared  in accordance with IFRS as issued by the IASB and endorsed by the EU. At 31 December 2018, there were no differences between  FRS 101 and IFRS as issued by the IASB and endorsed by the EU in terms of their application to the parent company.  The tables below provide a reconciliation between the FRS 101 parent company results and the IFRS Group results. Profit after tax Profit for the financial year of the Company (including dividends from subsidiaries)   in accordance with FRS 101 and IFRS Accounting policy difference* Share in the IFRS result of the Group, net of distributions to the Company† Profit after tax of the Group attributable to shareholders in accordance with IFRS Net equity Shareholders’ equity of the Company in accordance with FRS 101 and IFRS Accounting policy difference* Share in the IFRS net equity of the Group† Shareholders’ equity of the Group in accordance with IFRS 2018  £m 2017  £m 1,041 5 1,964 3,010 1,235 – 1,154 2,389 2018  £m 2017  £m 7,450 14 9,785 7,629 – 8,458 17,249 16,087 * Adjustment represents difference in accounting policy for expected credit losses on loan assets, the Company has adopted IFRS 9 while the Group applies IAS 39. † The ‘share in the IFRS result and net equity of the Group’ lines represent the parent company’s equity in the earnings and net assets of its subsidiaries and associates. The profit for the financial year of the Company in accordance with IFRS includes dividends received in the year from subsidiary  undertakings of £1,495 million and £1,685 million for the years ended 31 December 2018 and 2017, respectively. As stated in note 3, under FRS 101, the Company accounts for its investments in subsidiary undertakings at cost less impairment.  For the purpose of this reconciliation, no adjustment is made to the Company in respect of any valuation adjustments to shares in  subsidiary undertakings that would be eliminated on consolidation. 5 Investments in subsidiary undertakings At 1 January Capital injections Amounts in respect of share based payments At 31 December 2018  £m 2017  £m 10,798 88 (61) 10,825 10,859 – (61) 10,798 In January 2018 the Company provided £88 million to M&G to support the seed funding of the new Luxembourg-based SICAV open- ended collective investment schemes.  In November 2018, the Company transferred ownership of four of its subsidiaries associated with the UK and Europe business to  M&GPrudential under a share for share exchange, in preparation for the demerger of M&GPrudential and its subsidiaries from the  Group. Shares in the four entities transferred: The Prudential Assurance Company Limited, M&G Investments Management Limited,  Prudential Financial Services Limited and Prudential Property Services Limited, were transferred to M&GPrudential in return for shares in  M&GPrudential. There is no change to the value recorded in the Company’s financial statements. Amounts in respect of share-based payments of £(61) million (2017: £(61) million) comprise of £5 million (2017: £6 million) in respect  of share-based payments reflecting the value of payments settled by the Company for employees of its subsidiary undertakings, less  £(66) million (2017: £(67) million) relating to cash received from subsidiaries in respect of share awards. Subsidiary undertakings of the Company at 31 December 2018 are listed in note D6 of the Group financial statements. 324  Prudential plc  Annual Report 2018  www.prudential.co.uk Notes on the parent company financial statements continued6 Derivative financial instruments Cross-currency swap Inflation-linked swap Total 2018  £m 2017  £m Fair value assets Fair value liabilities Fair value assets Fair value liabilities 5 – 5 – 423 423 5 – 5 – 443 443 Derivative financial instruments are held to manage certain macro-economic exposures. The change in fair value of the derivative  financial instruments of the Company was a gain before tax of £20 million (2017: gain of £5 million). 7 Pension scheme financial position The majority of UK Prudential staff are members of the Group’s pension schemes. The largest scheme is the Prudential Staff Pension  Scheme (the Scheme) which is primarily a closed defined benefit scheme.  At 31 December 2005, the allocation of surpluses and deficits attaching to the Scheme between the Company and the unallocated  surplus of UK with-profits fund was apportioned in the ratio 30/70 following detailed consideration of the sourcing of previous  contributions. This ratio was applied to the base deficit position at 1 January 2006 and for the purpose of determining the allocation of the  movements in that position up to 31 December 2018. The IAS 19 service charge and ongoing employer contributions are allocated by  reference to the cost allocation for current activity. The last completed triennial actuarial valuation of the Scheme was as at 5 April 2017, which was finalised in 2018. Further details on  the results of this valuation and the total employer contributions to the Scheme for the year are provided in note C9 of the Group financial  statements, together with the key assumptions adopted, including mortality assumptions.  A description of the regulatory framework in which the Scheme operates, the governance of the Scheme, and the risks to which the  Scheme exposes the Company is provided in note C9 of the Group financial statements. The most recent full valuation has been updated  to 31 December 2018, applying the principles prescribed by IAS 19. The actuarial assumptions used in determining the IAS 19 benefit  obligations and the net periodic costs and sensitivity of IAS 19 benefit obligation to changes in the actuarial assumptions are also  provided in note C9 of the Group financial statements. The assets and liabilities of the Scheme were: 31 Dec 2018  £m 31 December 2017  £m Scheme assets: Equities UK Overseas Bonds* Government Corporate Asset-backed securities Properties Derivatives Other assets  Fair value of Scheme assets Present value of benefit obligations Underlying surplus in the Scheme  Effect of the application of IFRIC 14  for de-recognition of surplus Surplus in the Scheme Surplus in the Scheme recognised  by the Company† Quoted prices in an active market 8 194 4,596 1,457 243 – 103 117 6,718 Quoted prices in an active market 9 216 5,040 1,430 156 – 188 192 7,231 Other Total – 10 – 129 20 143 – 55 357 8 204 4,596 1,586 263 143 103 172 7,075 (6,167) 908 (677) 231 69 Other Total – 10 – 61 8 140 – 24 243 9 226 5,040 1,491 164 140 188 216 7,474 (6,753) 721 (485) 236 71 * 93 per cent (2017: 93 per cent) of the bonds are investment grade. † The surplus in the Scheme recognised in the balance sheet of the Company represents the amount that is recoverable through reduced future contributions and is net of the  apportionment to the UK with-profits fund. www.prudential.co.uk  Annual Report 2018  Prudential plc  325 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information7 Pension scheme financial position continued The changes in the fair value of the underlying Scheme assets and the present value of the underlying benefit obligations are as follows: Balance at 1 January Current service cost GMP equalisation provision note (iv) Net interest income (cost) Administration expenses Actuarial gains (losses) note (ii) Contributions paid by the employer note (iii) Contributions paid by the employee Benefits paid Balance at 31 December Balance at 1 January Current service cost Net interest income (cost) Administration expenses Actuarial gains (losses) note (ii) Contributions paid by the employer note (iii) Contributions paid by the employee Benefits paid Balance at 31 December Fair value of Scheme assets Present value of benefit obligations note (i) 7,474 – – 181 (7) (186) 10 – (397) 7,075 (6,753) (26) (31) (163) – 409 – – 397 (6,167) Fair value of Scheme assets Present value of benefit obligations note (i) 7,627 – 193 (6) 40 11 – (391) 7,474 (6,910) (26) (175) – (33) – – 391 (6,753) 2018  £m Net surplus without the effect of IFRIC 14 Effect of IFRIC 14 for de- recognition of surplus IAS 19 basis net surplus 721 (26) (31) 18 (7) 223 10 – – 908 (485) – – (13) – (179) – – – (677) 236 (26) (31) 5 (7) 44 10 – – 231 2017  £m Net surplus without the effect of IFRIC 14 Effect of IFRIC 14 for de- recognition of surplus IAS 19 basis net surplus 717 (26) 18 (6) 7 11 – – 721 (558) – (14) – 87 – – – (485) 159 (26) 4 (6) 94 11 – – 236 Notes (i)  £m 2018 2017 The weighted average duration of the benefit obligations of the Scheme is 17 years (2017: 17 years). The following table provides an expected maturity analysis of the undiscounted  benefit obligations as at 31 December: 1 year or less After 1 year to 5 years After 5 years to 10 years After 10 years to 15 years After 15 years to 20 years Over 20 years 240 238 1,061 1,030 1,449 1,445 1,426 1,452 1,349 1,375 5,265 5,554 Total 10,790 11,094 (ii)  The actuarial gains attributable to policyholders and shareholders are analysed as follows: 2018  £m 2017  £m Return on Scheme assets excluding interest income* Actuarial gains (losses) Experience gains on Scheme liabilities Actuarial gains (losses) – demographic assumptions Actuarial gains (losses) – financial assumptions Total actuarial gains (losses) without the effect of IFRIC 14 Actuarial gains attributable to the Company before tax† (186) 1 125 283 409 223 19 40 70 (10) (93) (33) 7 34 * The total return on Scheme assets in 2018 was a loss of £(5) million (2017: gain £233 million). † Actuarial gains attributable to the Company are net of the apportionment to the UK with-profits fund and are related to the surplus recognised in the balance sheet of the Company.  In 2018, the gains included a debit of £48 million (2017: credit £31 million) for the adjustment to the unrecognised portion of surplus.   The gains after tax of £16 million (2017: £28 million) are recorded in other comprehensive income.  (iii)  (iv)  Employer contributions to be paid into the Scheme for the year ending 31 December 2019 are expected to amount to £10 million, comprising ongoing service contributions  and expenses.  In October 2018, the High Court ruled that pension schemes are required to equalise benefits for the effect of guaranteed minimum pensions (GMPs). GMPs are a minimum benefit  that schemes that were contracted-out on a salary-related basis between 1978 and 1997 are required to provide.  In light of this Court ruling, at 31 December 2018, an estimated allowance for GMP equalisation of £31 million has been recognised within the IAS 19 valuation for the Scheme,  of which £9 million was allocated to the Company. The impact on profit before tax is £9 million (before taking into account any charge to PSPS surplus restriction). After taking into  account the change to the PSPS surplus restriction as reflected in the actuarial gains and losses within other comprehensive income, there was no impact on shareholders’ funds. 326  Prudential plc  Annual Report 2018  www.prudential.co.uk Notes on the parent company financial statements continued    8 Borrowings Core structural borrowings note (i) Subordinated liabilities note (ii) Debenture loans Bank loan Other borrowings: note (iii) Commercial paper Medium Term Notes 2018 Total borrowings  Borrowings are repayable as follows: Within 1 year Between 1 and 5 years After 5 years Core structural borrowings Other borrowings Total 2018  £m 2017  £m 2018  £m 2017  £m 2018  £m 2017  £m 6,676 517 275 7,468 – – 5,272 549 – 5,821 – – 7,468 5,821 – 587 6,881 7,468 – – 5,821 5,821 – – – – 472 – 472 472 – – 472 – – – – 485 600 1,085 1,085 – – 1,085 6,676 517 275 7,468 472 – 7,940 472 587 6,881 7,940 5,272 549 – 5,821 485 600 6,906 1,085 – 5,821 6,906 Notes (i)  (ii)  (iii)  Further details on the core structural borrowings of the Company are provided in note C6.1 of the Group financial statements. The interests of the holders of the subordinated liabilities are subordinate to the entitlements of other creditors of the Company. These borrowings support a short-term fixed income securities programme. 9 Deferred tax liability Deferred tax liability Short-term temporary differences related to pension scheme Total 10 Share capital and share premium 2018  £m 2017  £m (12) (12) (12) (12) A summary of the ordinary shares in issue and the options outstanding to subscribe for the Company’s shares at 31 December 2018  is set out in note C10 of the Group financial statements. www.prudential.co.uk  Annual Report 2018  Prudential plc  327 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information11 Retained profit of the Company Retained profit at 31 December 2018 amounted to £5,356 million (31 December 2017: £5,552 million). The retained profit includes  distributable reserves of £2,814 million and non-distributable reserves of £2,542 million. The non-distributable reserves comprise  £2,405 million relating to gains made by intermediate holding companies following the transfer at fair value of certain subsidiaries to other  parts of the Group as part of internal restructuring exercises in previous years, £80 million of share-based payment reserves and  £57 million net of taxation in relation the pension benefit surplus of the Company. The amount of £2,405 million is not able to be regarded  as part of the distributable reserves of the parent company because the gains relate to intra-group transactions. Under UK company law, Prudential may pay dividends only if sufficient distributable reserves of the Company are available for the  purpose and if the amount of its net assets is greater than the aggregate of its called up share capital and non-distributable reserves (such  as the share premium account) and the payment of the dividend does not reduce the amount of its net assets to less than that aggregate. The retained profit of the Company is substantially generated from dividend income received from subsidiaries. The Group segmental  analysis illustrates the generation of profit across the Group (see note B1 of the Group financial statements). The Group and its  subsidiaries are subject to local regulatory minimum capital requirements, as set out in note C12 of the Group financial statements.  A number of the principal risks set out in the ‘Report of the risks facing our business and how these are managed’ could impact the  generation of profit in the Group’s subsidiaries in the future and hence impact their ability to pay dividends in the future. In determining the dividend payment in any year the directors follow the Group dividend policy described in the Chief Financial  Officer’s report section of this Annual Report. The directors consider the Company’s ability to pay current and future dividends twice  a year by reference to the Company’s business plan and certain stressed scenarios. 12 Other information a  b  c  d  e   Information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report and note B2.3  of the Group financial statements.   Information on transactions of the directors with the Group is given in note D4 of the Group financial statements.   The Company employs no staff.  Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2017: £0.1 million)  and for other services were £0.1 million (2017: £0.1 million).   In certain instances, the Company has guaranteed that its subsidiaries will meet their obligations when they fall due for payment. 13 Post balance sheet events The second interim ordinary dividend for the year ended 31 December 2018, which was approved by the Board of Directors after  31 December 2018, is described in note B6 of the Group financial statements. 328  Prudential plc  Annual Report 2018  www.prudential.co.uk Notes on the parent company financial statements continuedStatement of Directors’ responsibilities in respect of the Annual Report and the financial statements TheDirectorsareresponsibleforpreparing theAnnualReportandtheGroupand parentcompanyfinancialstatementsin accordancewithapplicablelawand regulations. CompanylawrequirestheDirectorsto prepareGroupandparentcompany financialstatementsforeachfinancialyear. Underthatlaw,theDirectorsarerequired topreparetheGroupfinancialstatements inaccordancewithInternationalFinancial ReportingStandardsasadoptedbythe EuropeanUnion(IFRSsasadoptedbythe EU)andapplicablelawandhaveelected topreparetheparentcompanyfinancial statementsinaccordancewithUK AccountingStandardsandapplicablelaw (UKGenerallyAcceptedAccounting Practice)includingFRS101Reduced DisclosureFramework. Undercompanylaw,theDirectorsmust notapprovethefinancialstatementsunless theyaresatisfiedthattheygiveatrueand fairviewofthestateofaffairsoftheGroup andparentcompanyandoftheirprofitor lossforthatperiod.Inpreparingeachof theGroupandparentcompanyfinancial statements,theDirectorsarerequiredto: — Selectsuitableaccountingpoliciesand thenapplythemconsistently; TheDirectorsareresponsibleforkeeping adequateaccountingrecordsthatare sufficienttoshowandexplaintheparent company’stransactionsanddisclosewith reasonableaccuracyatanytimethe financialpositionoftheparentcompany andenablethemtoensurethatitsfinancial statementscomplywiththeCompanies Act2006.Theyhavegeneralresponsibility fortakingsuchstepsasarereasonably opentothemtosafeguardtheassetsofthe Groupandtopreventanddetectfraudand otherirregularities. Underapplicablelawandregulations,the directorsarealsoresponsibleforpreparing astrategicreport,Directors’report, directors’remunerationreportand corporategovernancestatementthat complywiththatlawandthoseregulations. TheDirectorsareresponsibleforthe maintenanceandintegrityofthecorporate andfinancialinformationincludedonthe Company’swebsite.Legislationinthe UKgoverningthepreparationand disseminationoffinancialstatementsmay differfromlegislationinotherjurisdictions. TheDirectorsofPrudentialplc,whose namesandpositionsaresetoutonpages 89to94confirmthattothebestoftheir knowledge: — Makejudgementsandestimatesthat — Thefinancialstatements,prepared arereasonableandprudent; — FortheGroupfinancialstatements, statewhethertheyhavebeenprepared inaccordancewithIFRSsasadoptedby theEU; — Fortheparentcompanyfinancial statements,statewhetherapplicable UKAccountingStandardshavebeen followed,subjecttoanymaterial departuresdisclosedandexplained intheparentcompanyfinancial statements;and — Preparethefinancialstatementson thegoingconcernbasisunlessitis inappropriatetopresumethatthe Groupandtheparentcompanywill continueinbusiness. inaccordancewiththeapplicableset ofaccountingstandards,giveatrue andfairviewoftheassets,liabilities, financialpositionandprofitorlossof theCompanyandtheundertakings includedintheconsolidationtaken asawhole; — Thestrategicreportincludesafair reviewofthedevelopmentand performanceofthebusinessand thepositionoftheGroupandthe undertakingsincludedinthe consolidationtakenasawhole,together withadescriptionoftheprincipalrisks anduncertaintiesthattheyface;and — TheAnnualReportandfinancial statements,takenasawhole,isfair, balancedandunderstandableand providestheinformationnecessaryfor shareholderstoassesstheGroup’s positionandperformance,business modelandstrategy. www.prudential.co.uk AnnualReport2018 Prudential plc 329 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationIndependent auditor’s report to the members of Prudential plc only 1 Our opinion is unmodified Wehaveauditedthefinancialstatements ofPrudentialplc(‘theGroupandparent company’)fortheyearended 31December2018whichcomprise: — theconsolidatedincomestatement, consolidatedstatementof comprehensiveincome,consolidated statementofchangesinequity, consolidatedstatementoffinancial positionandconsolidatedstatement ofcashflows,andtherelatednotes, includingaccountingpoliciesinnotes A3andE1;and — thestatementoffinancialposition, statementofchangesinequity,andthe relatednotes,includingthesignificant accountingpoliciesinnote3,ofthe parentcompanyfinancialstatements. Inouropinion: — Thefinancialstatementsgiveatrueand fairviewofthestateoftheGroup’sand oftheparentcompany’saffairsasat 31December2018andoftheGroup’s profitfortheyearthenended; — TheGroupfinancialstatementshave beenproperlypreparedinaccordance withInternationalFinancialReporting Standardsasadoptedbythe EuropeanUnion; — Theparentcompanyfinancial statementshavebeenproperlyprepared inaccordancewithUKAccounting StandardsincludingFRS101Reduced Disclosure Framework;and — Thefinancialstatementshavebeen preparedinaccordancewiththe requirementsoftheCompaniesAct 2006and,asregardstheGroup financialstatements,Article4ofthe IASRegulation. Basis for opinion Weconductedourauditinaccordance withInternationalStandardsonAuditing (UK)(‘ISAs(UK)’)andapplicablelaw. Ourresponsibilitiesaredescribedbelow. Webelievethattheauditevidencewehave obtainedisasufficientandappropriate basisforouropinion.Ourauditopinion isconsistentwithourreporttothe auditcommittee. Wewereappointedasauditorbythe shareholdersinOctober1999.Theperiod oftotaluninterruptedengagement isforthe20financialyearsended 31December2018.Wehavefulfilled ourethicalresponsibilitiesunder,and weremainindependentoftheGroupin accordancewith,UKethicalrequirements includingtheFinancialReportingCouncil (‘FRC’)EthicalStandardasappliedto listedpublicinterestentities.Nonon-audit servicesprohibitedbythatstandard wereprovided. 2 Key audit matters: including our assessment of risks of material misstatement Keyauditmattersarethosemattersthat,inourprofessionaljudgement,wereofmostsignificanceintheauditofthefinancialstatements andincludethemostsignificantassessedrisksofmaterialmisstatement(whetherornotduetofraud)identifiedbyus,includingthose whichhadthegreatesteffecton:theoverallauditstrategy;theallocationofresourcesintheaudit;anddirectingtheeffortsofthe engagementteam.Wesummarisebelowthekeyauditmattersinarrivingatourauditopinionabove,togetherwithourkeyaudit procedurestoaddressthosemattersand,asrequiredforpublicinterestentities,ourresultsfromthoseprocedures.Thesematterswere addressed,andourresultsarebasedonproceduresundertaken,inthecontextof,andsolelyforthepurposeof,ourauditofthefinancial statementsasawhole,andinformingouropinionthereon,andconsequentlyareincidentaltothatopinion,andwedonotprovidea separateopiniononthesematters. 330 Prudential plc AnnualReport2018 www.prudential.co.uk Valuation of policyholder liabilities (2018: £409,301 million, 2017: £411,243 million). The risk compared to the prior year is unchanged. Refer to page 115 (Audit Committee report), page 181 (accounting policy) and pages 241 to 264 (financial disclosures). The risk Our response TheGrouphassignificantpolicyholderliabilitiesrepresenting 83percentoftheGroup’stotalliabilities. Weusedourownactuarialspecialiststoassistusinperforming ourproceduresinthisarea. Subjective valuation Thisisanareathatinvolvessignificantjudgementoveruncertain futureoutcomes,mainlytheultimatetotalsettlementvalueoflong termpolicyholderliabilities.Economicassumptions,including investmentreturn,creditriskandassociateddiscountrates,and operatingassumptionsincludingmortality,morbidity,expenses, utilisationofguaranteesandpersistency(includingconsideration ofpolicyholderbehaviour)arethekeyinputsusedtoestimate theselongtermliabilities,inadditiontotheappropriatedesign andcalibrationofcomplexreservingmodels. Thespecificapplicationofthesejudgementstoindividual segmentsisexplainedbelow. FortheUSinsurancesegment,thevaluationoftheguarantees inthevariableannuity(‘VA’)businessiscomplexasitinvolves exercisingsignificantjudgementovertherelationshipbetweenthe investmentreturnattachingtotheseproductsandtheguarantees contractuallyprovidedtopolicyholdersandthelikelypolicyholder behaviourinresponsetochangesininvestmentperformance. FortheUKinsurancesegment,thevaluationofthepolicyholder liabilitiesinrelationtotheannuitybusinessrequiressignificant judgementoverthesettingofmortality,expensesandcreditrisk assumptions. FortheAsiainsurancesegment,thevaluationofthepolicyholder liabilitiesrequiressignificantjudgementoverthesettingof mortalityandmorbidityassumptions. Theeffectofthesemattersisthat,aspartofourriskassessment, wedeterminedthatthevaluationofpolicyholderliabilitieshasa highdegreeofestimationuncertainty,withapotentialrangeof reasonableoutcomesgreaterthanourmaterialityforthefinancial statementsasawholeandpossiblymanytimesthatamount. Ourproceduresincluded: Methodology choice Wehaveassessedthemethodologyforselectingassumptions andcalculatingthepolicyholderliabilities.Thisincluded: — Assessingthemethodologyadoptedforselectingassumptions byapplyingourindustryknowledgeandexperienceand comparingthemethodologyusedagainstindustrystandard actuarialpractice; — Assessingthemethodologyadoptedforcalculatingthe policyholderliabilitiesbyreferencetotherequirementsofthe accountingstandardandassessingtheimpactofcurrentyear changesinmethodologyonthecalculationofpolicyholder liabilities; — Comparingchangesinmethodologytoourexpectationsderived frommarketexperience;and — Evaluatingtheanalysisofthemovementsinpolicyholder liabilitiesduringtheyear,includingconsiderationofwhether themovementswereinlinewiththemethodologyand assumptionsadopted. Control operation WeusedourownITspecialiststoassistusinperformingour proceduresinthisareawhichincludedtestingofthedesign, implementationandoperatingeffectivenessofkeycontrolsoverthe valuationprocessincludingadditionaltestinginrelationtomodel evaluationasaresultofidentifiedweaknessesinthegeneralIT controlenvironment.Controlstestinginrespectofthevaluation processincludedassessmentandapprovalofthemethodsand assumptionsadoptedoverthecalculationofpolicyholderliabilities aswellasappropriateaccessandchangemanagementcontrolsover theactuarialmodels. Our procedures for the US insurance segment also included: Historical comparison — Assessingtheassumptionsrelatingtopolicyholderbehaviourby comparingtorelevantcompanyandindustryhistorical experiencedata. Benchmarking assumptions and sector experience — Assessingtheassumptionsforinvestmentmixandprojected investmentreturnsbycomparingtocompanyspecificand industrydataandforfuturegrowthratesbycomparingtomarket trendsandmarketvolatility. — Utilisingtheresultsofourindustrybenchmarkingofassumptions andactuarialmarketpracticetoinformourchallengeof assumptionsinrelationtopolicyholderbehaviour. Model evaluation — Assessingthecashflowprojectionsinthereservingmodelsby referencetotheinclusionofrelevantproductfeatures.Wehave alsoassessedtheimpactofmodellingandassumptionchanges byinspectingpreandpostchangemodelrunsandcomparing theoutcomesofthechangestoourexpectations. www.prudential.co.uk AnnualReport2018 Prudential plc 331 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationValuation of policyholder liabilities (2018: £409,301 million, 2017: £411,243 million). The risk compared to the prior year is unchanged. Refer to page 115 (Audit Committee report), page 181 (accounting policy) and pages 241 to 264 (financial disclosures). The risk Our response Our procedures for the UK insurance segment also included: Historical comparison — Evaluatingthedatausedtopreparethemortalityexperience analysisbyreferencetoactualmortalityexperienceofthe policyholdersinordertoassesswhetherthissupportedthe year-endassumptionsadopted. — Assessingwhethertheexpenseassumptionsappropriately reflecttheexpectedfuturecostsofadministeringtheunderlying policiesbyanalysingcurrentyearunitcostsandthelikelyimpact ofplannedactions. Benchmarking assumptions and sector experience — Comparingmortalityexperiencetoindustrydataoncurrent mortalityandexpectationsoffuturemortalityimprovements. — Evaluatingthecreditriskassumptions,whichaffectdiscount rates,byreferencetoindustrypracticeandourexpectation derivedfrommarketexperiencetakingintoconsideration economicfactors. — Usingtheresultsofourindustrybenchmarkingofassumptionsand actuarialmarketpracticetoinformourchallengeoftheassumptions inrelationtothemortality,creditriskandexpenseassumptions. Model evaluation — Evaluatingtheappropriatenessofthecalibrationofthe ContinuousMortalityInvestigation(‘CMI’)model(theCMI Bureaureleasesindustrywidemortalitytables),adoptedbased ontheanalysisofthecharacteristicsofthepolicyholder populationandactualmortalityexperience. — Weusedourownvaluationmodelstoperformanindependent recalculationofasampleofpolicyholderliabilitiestoassesswhether theselectedmodelcalibrationhasbeenappropriatelyimplemented. Our procedures for the Asia insurance segment also included: Historical comparison Evaluatingtheexperienceanalysisinrespectofthemortalityand morbidityassumptionsbyreferencetoactualexperienceinorderto assesswhetherthissupportedtheyear-endassumptionsadopted. Benchmarking assumptions and sector experience Usingoursectorexperienceandmarketknowledgetoinformour challengeoftheassumptionsintheareasnotedabove. Model evaluation Wehaveassessedthereservingmodelsbyconsideringtheaccuracy ofthecashflowprojectionsincludingbyreferencetotheinclusion ofrelevantproductfeatures.Wehavealsoassessedtheimpact ofmodellingandassumptionchangesbyinspectingpreandpost changemodelrunsandcomparingtheoutcomesofthechanges toourexpectations. Assessing transparency Weconsideredwhetherthedisclosuresinrelationtotheassumptions usedinthevaluationofpolicyholderliabilitiesarecompliantwiththe relevantaccountingrequirements. Our result Wefoundthevaluationofpolicyholderliabilitiestobeacceptable (2017:acceptable). 332 Prudential plc AnnualReport2018 www.prudential.co.uk Independent auditor’s report to the members of Prudential plc only continuedValuation of investments (2018: £418,105 million, 2017: £422,230 million). The risk compared to the prior year is unchanged. Refer to page 115 (Audit Committee report), page 187 (accounting policy) and pages 221 to 240 (financial disclosures) The risk Our response TheGroup’sinvestmentportfoliorepresents82percentofthe Group’stotalassets. Weusedourownvaluationspecialistsinordertoassistusin performingourproceduresinthisarea. Theportfolioofquotedinvestmentsandinvestmentsthatare valuedprimarilyusingobservableinputsmakesup78percentof theGroup’stotalassets(byvalue).Wedonotconsiderthese investmentstobeatahighriskofsignificantmisstatement,ortobe subjecttoasignificantlevelofjudgementbecausetheycomprise liquid,quotedinvestments.However,duetotheirmaterialityinthe contextofthefinancialstatementsasawhole,theyareconsidered tobeoneoftheareaswhichhadthegreatesteffectonouroverall auditstrategyandallocationofresourcesinplanningand completingouraudit. Subjective valuation Theareathatinvolvedsignificantauditeffortandjudgementin 2018wasthevaluationofcertainhardertovaluelevel2andlevel3 positionswithinthefinancialinvestmentsportfoliorepresenting 5percentoftheGroup’stotalassets.Theseincludedunlisteddebt securities,unlistedloansandunlistedfundsthatarevaluedby referencetotheirNetAssetValue(‘NAVfunds’).Forthese positionsareliablethirdpartypricewasnotreadilyavailableand thereforeinvolvedtheapplicationofexpertjudgementinthe valuationsadopted. Thevaluationoftheportfolioinvolvesjudgementdependingon theobservabilityoftheinputsintothevaluationandfurther judgementindeterminingtheappropriatevaluationmethodology forhardertovalueinvestmentswhereexternalpricingsourcesare eithernotreadilyavailableorareunreliable. Theeffectofthesemattersisthat,aspartofourriskassessment, wedeterminedthatthevaluationofinvestmentshasahighdegree ofestimationuncertainty,withapotentialrangeofreasonable outcomesgreaterthanourmaterialityforthefinancialstatements asawholeandpossiblymanytimesthatamount. Ourproceduresincluded: Methodology choice Weassessedtheappropriatenessofthepricingmethodologieswith referencetorelevantaccountingstandardsaswellasindustry practice. For quoted investments: Tests of details Weperformedindependentpricechecksusingexternalquoted pricesandbyagreeingtheobservableinputsthatwereusedinthe Group’svaluationtechniquestoexternaldata. For harder to value positions: Control operation Wetestedthedesign,implementationandoperatingeffectiveness ofkeycontrolsoverthevaluationprocess,includingtheGroup’s reviewandapprovaloftheestimatesandassumptionsusedforthe valuationincludingkeyauthorisationanddatainputcontrols. Benchmarking assumptions Weassessedasampleofthevaluationassumptionswithreference totheGroup’sownvaluationguidelinesaswellasindustrypractice. Tests of details Forasampleofunlisteddebtandloansecuritieswecomparedthe priceadoptedtoourindependentlyderivedprice,usingour valuationspecialists. WeagreedthevaluationsfortheNAVfundstothemostrecentNAV statements.Toassessreliabilityofthesestatementswecompared toauditedfinancialstatementsofthefunds,whereavailable, orperformedaretrospectivetestovertheNAVvaluationsforeach fundtoassessifthefundvaluationsreportedintheauditedfinancial statementsintheprioryearweremateriallyconsistentwiththemost recentNAVvaluationstatementsavailableatthetime. Assessing transparency Weassessedwhetherthedisclosuresinrelationtothevaluation ofinvestmentsarecompliantwiththerelevantaccounting requirements. Our result Wefoundthevaluationofinvestmentstobeacceptable (2017:acceptable). www.prudential.co.uk AnnualReport2018 Prudential plc 333 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationAmortisation of US deferred acquisition costs (‘DAC’) (2018: £8,727 million, 2017: £8,197 million). The risk compared to the prior year is unchanged. Refer to page 115 (Audit Committee report), page 185 (accounting policy) and pages 266 to 268 (financial disclosures) The risk Our response DACrepresents2percentoftheGroup’stotalassets.TheDAC associatedwiththeUScomponent,whichrepresents86percent ofthetotalDAC,involvesthegreatestjudgementinterms ofmeasurement. Accounting treatment DACinvolvesjudgementsinrespectoftheidentificationofthe acquisitioncoststhatmaybedeferredandtheappropriateness ofthedeferralmethodologyadopted. TheamortisationassessmentoftheDACassetintheUS componentisrelatedtotheachievedandprojectedfutureprofit profile.Thisinvolvesmakingassumptionsaboutfutureinvestment returnsandtheconsequentialimpactonfeeincome;therefore thereisagreaterlevelofsubjectivityinvolvedinrelationtothe USDAC. Theeffectofthesemattersisthat,aspartofourriskassessment, wedeterminedthattheamortisationofDAChasahighdegree ofestimationuncertainty,withapotentialrangeofreasonable outcomesgreaterthanourmaterialityforthefinancialstatements asawhole. Weusedourownactuarialspecialiststoassistusinperforming ourauditproceduresinthisarea. Ourproceduresincluded: Accounting analysis Weevaluatedtheappropriatenessofthedeferralmethodology byreferencetotherequirementsofrelevantaccountingstandards. Testing application Weevaluatedthejudgementsinvolvedindeterminingwhether thecostsincurredaredeferredappropriatelybyreferencetothe adopteddeferralmethodology. Benchmarking assumptions and market experience Allassumptionsthatarerelevanttothecalculationofthepolicyholder liabilitiesarealsorelevanttothecalculationofDACamortisation. Seefurtherdetailinourresponsetothatrisk. Additionally,wechallengedthereasonablenessoftheselected assumptionsrelatingtoprojectedinvestmentreturnbasedon ourunderstandingofdevelopmentsinthebusinessandour expectationsderivedfrommarketexperience.Ourworkincluded comparingtheprojectedinvestmentreturnsagainsttheinvestment portfoliomixandmarketreturndata,andcorroboratingthe rationaleforanykeydifferences. Historical comparison Wehavealsoassessedtheappropriatenessoftheassumptionsused indeterminingtheestimatedfutureprofitprofileandtheextentof theassociatedadjustmentnecessarytotheamortisationoftheDAC asset.Ourworkincludedcriticallyassessingthejudgementsthat determinethefutureprofitprofilesinthecontextofactualhistorical experienceaswellasbyreferencetomarkettrends. Tests of detail Weassessedtheaccuracyofthecalculationsperformedincluding theextentoftheamortisationadjustmentdeterminedbasedonan assessmentofthefutureprofitprofiles. Assessing transparency Weassessedwhetherthedisclosuresinrelationtotheamortisation ofDACarecompliantwiththerelevantaccountingrequirements. Our result WefoundthecapitalisationandamortisationofDACtobe acceptable(2017:acceptable). 334 Prudential plc AnnualReport2018 www.prudential.co.uk Independent auditor’s report to the members of Prudential plc only continuedDetermination of pension asset (restricted surplus) in respect of the defined benefit pension scheme (Pension asset (restricted surplus) – 2018: £69 million, 2017: £71 million). The risk compared to the prior year is unchanged. The risk relates to the parent company financial statements. Refer to page 115 (Audit Committee report), Refer to page 323 (accounting policy) and pages 284 to 290 (financial disclosures) The risk Our response Theparentcompanyassumesaportionofthesurplusofthe Group’smaindefinedbenefitpensionscheme. Subjective valuation Whereanentitydoesnothavearighttoarefundtheassetceiling (limitoftheamountrecognised)isdeterminedbyreferenceto thepresentvalueofthedifferencebetweentheestimatedfuture servicecostandthecontributionspayablebytheentityoverthe futureworkinglivesoftheactivemembers.Assumptionsaremade overthefutureservicecosts. Thecalculationofthedefinedbenefitobligationrequiresthe determinationofanumberofassumptions,andjudgementis requiredtodeterminetheappropriatenessofthese.Themost significantassumptionsincludemortalityandthediscountrate. Ourproceduresincluded: Methodology choice Weassessed,withthesupportofourpensionspecialists, themethodologyforselectingassumptionsunderpinningthe calculationofthedefinedbenefitpensionobligationandthe estimatedfutureservicecostleadingtotheconsequentcalculation oftherestrictedsurplus. Tests of detail Weassessedthereasonablenessofthemortalityassumptionsand discountratebyreferencetoentityspecificdatainrespectofthe demographiccharacteristicsofthepopulationofpensionscheme membersandfactorssuchassalaryinflation. Wealsoconsideredwhetherthemovementsinthedefinedbenefit pensionobligationandtheestimatedfutureservicecost,including theconsequentialcalculationoftherestrictedsurplus,were consistentwiththechangesmadeintheassumptionsfromthe prioryear. Benchmarking assumptions Wechallenged,withthesupportofourownpensionspecialists, thekeyassumptionsappliedtothepensionobligation,beingthe discountandmortalityrates,againstexternallyderiveddata. Our result Wefoundthepensionasset(restrictedsurplus)recognisedin respectofthedefinedbenefitpensionschemetobeacceptable (2017:acceptable). www.prudential.co.uk AnnualReport2018 Prudential plc 335 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationThe impact of uncertainties due to the UK exiting the European Union on our audit Refer to page 52 (Group Chief Risk Officer’s Report), page 68 (viability statement), page 115 (Audit Committee Report) and page 194 (financial disclosures). The risk Our response Levels of uncertainty due to Brexit Allauditsassessandchallengethereasonablenessofestimates, inparticularasdescribedinthevaluationofpolicyholderliabilities, valuationofinvestmentsandthedeterminationofthedefined benefitpensionasset(restrictedsurplus)above,andrelated disclosuresandtheappropriatenessofthegoingconcernbasis ofpreparationofthefinancialstatements(seebelow).Allofthese dependonassessmentsofthefutureeconomicenvironment andthegroup’sfutureprospectsandperformance. Inaddition,wearerequiredtoconsidertheotherinformation presentedintheAnnualReportincludingtheprincipalrisks disclosureandtheviabilitystatementandtoconsiderthedirectors’ statementthattheannualreportandfinancialstatementstaken asawholeisfair,balancedandunderstandableandprovides theinformationnecessaryforshareholderstoassesstheGroup’s positionandperformance,businessmodelandstrategy. Brexitisoneofthemostsignificanteconomiceventsforthe UKandatthedateofthisreportitseffectsaresubjectto unprecedentedlevelsofuncertaintyofoutcomes,withthe fullrangeofpossibleeffectsunknown. Wedevelopedastandardisedfirm-wideapproachtothe considerationoftheuncertaintiesarisingfromBrexitinplanning andperformingouraudits.Ourproceduresincluded: — OurBrexitknowledge–Weconsideredthedirectors’assessment ofBrexit-relatedsourcesofriskfortheGroup’sbusinessand financialresourcescomparedwithourownunderstandingofthe risks.Weconsideredthedirectors’planstotakeactiontomitigate therisks. — Sensitivityanalysis–Whenaddressingthevaluationof policyholderliabilities,valuationofinvestmentsandthe determinationofthepensionasset(restrictedsurplus)inrespect ofthedefinedbenefitpensionschemeandotherareasthat dependonforecastswecomparedthedirectors’analysistoour assessmentofthefullrangeofreasonablypossiblescenarios resultingfromBrexituncertaintyand,whereforecastcashflows arerequiredtobediscounted,consideredadjustmentstodiscount ratesforthelevelofremaininguncertainty. — Assessingtransparency–Aswellasassessingindividual disclosuresaspartofourproceduresonvaluationofpolicyholder liabilities,valuationofinvestmentsandthedeterminationofthe pensionasset(restrictedsurplus)inrespectofthedefinedbenefit pensionscheme,weconsideredalloftheBrexitrelateddisclosures together,includingthoseinthestrategicreport,comparingthe overallpictureagainstourunderstandingoftherisks. Our result Asreportedundervaluationofpolicyholderliabilities,valuationof investmentsandthedeterminationofthepensionasset(restricted surplus)inrespectofthedefinedbenefitpensionscheme,wefound theresultingestimatesandrelateddisclosuresofthesemattersand disclosuresinrelationtogoingconcerntobeacceptable.However, noauditshouldbeexpectedtopredicttheunknowablefactorsorall possiblefutureimplicationsforacompanyandthisisparticularlythe caseinrelationtoBrexit. 3 Our application of materiality and an overview of the scope of our audit MaterialityfortheGroupfinancial statementsasawholewassetat £350million(2017:£350million) determinedwithreferencetoabenchmark ofIFRSshareholders’equity(ofwhichit represents2percent(2017:2.2percent)). WeconsiderIFRSshareholders’equityto bethemostappropriatebenchmarkasit representstheresidualinterestthatcanbe ascribedtoshareholdersafterpolicyholder assetsandcorrespondingliabilitieshave beenaccountedfor;weconsiderthatthis isthemostappropriatemeasureforthe sizeofthebusinessandthatitprovidesa stablemeasureyearonyear.Wecompared ourmaterialityagainstotherrelevant benchmarks,suchastotalassets,total revenueandprofitbeforetaxtoensure thematerialityselectedwasappropriate forouraudit. Wesetoutbelowthematerialitythresholdsthatarekeytotheaudit. IFRS shareholders’ equity £17.25 billion (2017: £16.09 billion) Group materiality £350 million (2017: £350 million) A A £350 million Whole financial statements materiality (2017: £350 million) 1 2 B C B £115 million Range of materiality at 16 components (£55 million to £115 million) (2017: £80 million to £186 million) C £18 million Misstatements reported to the Audit Committee (2017: £18 million) 1 IFRSshareholders’equity 2 Groupmateriality 336 Prudential plc AnnualReport2018 www.prudential.co.uk Independent auditor’s report to the members of Prudential plc only continuedThesecomponentsaccountedforthefollowingpercentagesoftheGroup’sresults: Group revenue Group profit before tax 3% 93% 2% 92% 96% (2017 94%) 6% 91% 10% 86% 97% (2017 96%) Group total assets Group shareholders’ equity 5% 92% 5% 91% 97% (2017 96%) 5% 89% 4% 90% 94% (2017 94%)  FullscopeforGroupauditpurposes2018  Auditofaccountbalancesandspecifiedrisk-focusedauditprocedures2018  FullscopeforGroupauditpurposes2017  Auditofaccountbalances2017  Residualcomponents Materialityfortheparentcompany financialstatementsasawholewasset at£115million(2017:£186million), determinedwithreferencetoabenchmark ofparentcompany’snetassets,ofwhich itrepresents1.5percent(2017: 2.4percent). WeagreedtoreporttotheGroupaudit committeeanycorrectedoruncorrected identifiedmisstatementsexceeding £18million(2017:£18million)inaddition tootheridentifiedmisstatementsthat warrantreportingonqualitativegrounds. WesubjectedtheGroup’soperations toauditsforgroupreportingpurposes asfollows: Ofthe16(2017:16)reportingcomponents scopedinfortheGroupaudit,we subjected10(2017:10)tofullscopeaudits forgroupreportingpurposes,5(2017:6) toanauditofaccountbalancesand1 (2017:Nil)tospecifiedrisk-focusedaudit procedures.Thecomponentsforwhich weperformedworkotherthanfullscope auditsforgroupreportingpurposeswere notindividuallysignificantbutwere includedinthescopeofourgroup reportingworkastheydidpresentspecific individualauditrisksthatneededtobe addressedorinordertoprovidefurther coverageovertheGroup’sresults. Thecomponentssubjectedtofullscope auditsincludedtheparentcompany;the PrudentialAssuranceCompanyLimited intheUKandtheinsuranceoperationsin theUS,HongKong,Indonesia,Singapore, Malaysia,ThailandandVietnam;andthe fundmanagementoperationsofM&G. Thecomponentssubjectedtoanaudit ofaccountbalancesincludedPrudential Capital,PrudentialPensionsLimited, PrudentialLoanInvestmentFund(allbased intheUK)andtheinsuranceoperationsin ChinaandTaiwan.Theaccountbalances auditedwerepolicyholderliabilities, investmentsanddeferredacquisitioncosts. Additionally,wesubjectedEastspring Singaporetospecifiedrisk-focusedaudit proceduresoverrevenue. Fortheremainingoperations,we performedanalysisatanaggregatedGroup leveltore-examineourassessmentthat therewerenosignificantrisksofmaterial misstatementwithintheseoperations. www.prudential.co.uk AnnualReport2018 Prudential plc 337 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationTheGroupauditteamheldaglobal planningconferencewithcomponent auditorstoidentifyauditrisksanddecide howeachcomponentteamshouldaddress theidentifiedauditrisks.TheGroupaudit teaminstructedcomponentauditors astothesignificantareastobecovered, includingtherelevantrisksdetailed aboveandtheinformationtobereported. TheGroupauditteamapprovedthe componentmaterialities,whichranged from£55millionto£115million(2017: £80millionto£186million)acrossthe components,havingregardtothesize andriskprofileoftheGroupacrossthe components.Theworkon15components (2017:15components)wasperformed bycomponentauditorsandworkonthe remainingcomponent,whichwasthe parentcompany,wasperformedbythe Groupauditteam. TheGroupauditteamvisitedall componentauditorlocations.Video andtelephoneconferencemeetingswere alsoheldwiththesecomponentauditors. Atthesevisitsandtelephoneconference meetings,anassessmentwasmade ofauditriskandstrategy,thefindings reportedtotheGroupauditteamwere discussedinmoredetail,keyworking paperswereinspectedandanyfurther workrequiredbytheGroupauditteamwas thenperformedbythecomponentauditor. TheSeniorStatutoryAuditor,inconjunction withotherseniorstaffintheGroupand componentauditteams,alsoregularly attendedBusinessUnitauditcommittee meetings(thesewereheldataregional levelforAsia)andparticipatedinmeetings withlocalcomponentstoobtainadditional understanding,firsthand,ofthekeyrisks andauditissuesatacomponentlevelwhich mayaffecttheGroupfinancialstatements. 4 We have nothing to report on going concern TheDirectorshavepreparedthefinancial statementsonthegoingconcernbasis astheydonotintendtoliquidatethe CompanyortheGrouportoceasetheir operations,andastheyhaveconcluded thattheCompany’sandtheGroup’s financialpositionmeansthatthisisrealistic. Theyhavealsoconcludedthatthereare nomaterialuncertaintiesthatcouldhave castsignificantdoubtovertheirability tocontinueasagoingconcernforatleast ayearfromthedateofapprovalof thefinancialstatements(‘thegoing concernperiod’). Ourresponsibilityistoconcludeon theappropriatenessoftheDirectors’ conclusionsand,hadtherebeenamaterial uncertaintyrelatedtogoingconcern,to makereferencetothatinthisauditreport. However,aswecannotpredictallfuture eventsorconditionsandassubsequent eventsmayresultinoutcomesthatare inconsistentwithjudgementsthatwere reasonableatthetimetheyweremade, theabsenceofreferencetoamaterial uncertaintyinthisauditor’sreportisnot aguaranteethattheGroupandthe Companywillcontinueinoperation. InourevaluationoftheDirectors’ conclusions,weconsideredtheinherent riskstotheGroup’sandCompany’s businessmodelandanalysedhowthose risksmightaffecttheGroup’sand Company’sfinancialresourcesorability tocontinueoperationsoverthegoing concernperiod.Therisksthatwe consideredmostlikelytoadverselyaffect theGroup’sandCompany’savailable financialresourcesoverthisperiodwere: — Adverseimpactsarisingfrom fluctuationsornegativetrendsinthe economicenvironmentwhichaffect thevaluationsoftheGroup’s investments,widercreditspreadsand defaultsandvaluationofpolicyholder liabilitiesduetotheimpactofthese marketmovements;and — Severelyadversepolicyholderlapse orclaimsexperience. Asthesewererisksthatcouldpotentially castsignificantdoubtontheGroup’sand theCompany’sabilitytocontinueasagoing concern,weconsideredsensitivitiesover thelevelofavailablefinancialresources indicatedbytheGroup’sfinancialforecasts takingaccountofreasonablypossible (butnotunrealistic)adverseeffectsthat couldarisefromtheserisksindividuallyand collectivelyandevaluatedtheachievability oftheactionstheDirectorsconsiderthey wouldtaketoimprovethepositionshould therisksmaterialise.Wealsoconsidered lesspredictablebutrealisticsecondorder impacts,suchasfailureofcounterparties whohavetransactionswiththeGroup (suchasbanksandreinsurers)tomeet commitmentsthatcouldgiverisetoa negativeimpactontheGroup’sfinancial position,increasedilliquiditywhichalso addstouncertaintyovertheaccessibility offinancialresourcesandmayreduce capitalresourcesasvaluationsdecline andtheimpactofBrexitontheeconomic environmentandtheresultingimpact ontheGroup’scapitalresources. Basedonthiswork,wearerequired toreporttoyouif: — Wehaveanythingmaterialtoaddor drawattentiontoinrelationtothe directors’statementinnoteA1tothe financialstatementsontheuseofthe goingconcernbasisofaccountingwith nomaterialuncertaintiesthatmaycast significantdoubtovertheGroupand Company’suseofthatbasisforaperiod ofatleastayearfromthedateof approvalofthefinancialstatements;or — TherelatedstatementundertheListing Rulessetoutonpage128ismaterially inconsistentwithourauditknowledge. Wehavenothingtoreportinthese respects,andwedidnotidentifygoing concernasakeyauditmatter. 5 We have nothing to report on the other information in the Annual Report Thedirectorsareresponsibleforthe otherinformationpresentedinthe AnnualReporttogetherwiththefinancial statements.Ouropiniononthefinancial statementsdoesnotcovertheother informationand,accordingly,wedonot expressanauditopinionor,exceptas explicitlystatedbelow,anyformof assuranceconclusionthereon. Ourresponsibilityistoreadtheother informationand,indoingso,consider whether,basedonourfinancialstatements auditwork,theinformationthereinis materiallymisstatedorinconsistentwith thefinancialstatementsorouraudit knowledge.Basedsolelyonthatworkwe havenotidentifiedmaterialmisstatements intheotherinformation. Strategic report and directors’ report Basedsolelyonourworkontheother information: — wehavenotidentifiedmaterial misstatementsinthestrategicreport andthedirectors’report; — inouropiniontheinformationgivenin thosereportsforthefinancialyearis consistentwiththefinancialstatements; and — inouropinionthosereportshavebeen preparedinaccordancewiththe CompaniesAct2006. Directors’ remuneration report InouropinionthepartoftheDirectors’ RemunerationReporttobeauditedhas beenproperlypreparedinaccordance withtheCompaniesAct2006. 338 Prudential plc AnnualReport2018 www.prudential.co.uk Independent auditor’s report to the members of Prudential plc only continuedDisclosures of principal risks and longer-term viability Basedontheknowledgeweacquired duringouraudit,wehavenothingmaterial toaddordrawattentiontoinrelationto: — Thesectionoftheannualreport describingtheworkoftheAudit Committeedoesnotappropriately addressmatterscommunicated byustotheAuditCommittee. — Thedirectors’confirmationwithin theviabilitystatementonpage68, thattheyhavecarriedoutarobust assessmentoftheprincipalrisksfacing theGroup,includingthosethatwould threatenitsbusinessmodel,future performance,solvencyandliquidity; — Theprincipalrisksdisclosuresonpages 52to69describingtheserisksand explaininghowtheyarebeingmanaged andmitigated;and — Thedirectors’explanationinthe viabilitystatementofhowtheyhave assessedtheprospectsoftheGroup, overwhatperiodtheyhavedoneso andwhytheyconsideredthatperiod tobeappropriate,andtheirstatement astowhethertheyhaveareasonable expectationthattheGroupwillbeable tocontinueinoperationandmeetits liabilitiesastheyfalldueovertheperiod oftheirassessment,includingany relateddisclosuresdrawingattention toanynecessaryqualifications orassumptions. UndertheListingRuleswearerequired toreviewtheviabilitystatement.Wehave nothingtoreportinthisrespect. Ourworkislimitedtoassessingthese mattersinthecontextofonlythe knowledgeacquiredduringourfinancial statementsaudit.Aswecannotpredict allfutureeventsorconditionsandas subsequenteventsmayresultinoutcomes thatareinconsistentwithjudgementsthat werereasonableatthetimetheywere made,theabsenceofanythingtoreport onthesestatementsisnotaguarantee astotheGroup’slonger-termviability. Corporate governance disclosures Wearerequiredtoreporttoyouif: — Wehaveidentifiedmaterial inconsistenciesbetweentheknowledge weacquiredduringourfinancial statementsauditandthedirectors’ statementthattheyconsiderthatthe annualreportandfinancialstatements takenasawholeisfair,balancedand understandableandprovidesthe informationnecessaryforshareholders toassesstheGroup’spositionand performance,businessmodeland strategy;or Wearerequiredtoreporttoyouifthe CorporateGovernanceStatementdoes notproperlydiscloseadeparturefrom the11provisionsoftheUKCorporate GovernanceCodespecifiedbytheListing Rulesforourreview. Wehavenothingtoreportintheserespects. 6 We have nothing to report in respect of the matters on which we are required to report by exception UndertheCompaniesAct2006weare requiredtoreporttoyouif,inouropinion: — Adequateaccountingrecordshavenot beenkeptbytheparentcompany,or returnsadequateforouraudithavenot beenreceivedfrombranchesnotvisited byus;or — Theparentcompanyfinancial statementsandthepartoftheDirectors’ RemunerationReporttobeauditedare notinagreementwiththeaccounting recordsandreturns;or — Certaindisclosuresofdirectors’ remunerationspecifiedbylaware notmade;or — Wehavenotreceivedallthe informationandexplanations werequireforouraudit. Wehavenothingtoreportintheserespects. 7 Respective responsibilities Directors’ responsibilities Asexplainedmorefullyintheirstatement setoutonpage329,thedirectorsare responsibleforthepreparationofthe financialstatementsincludingbeing satisfiedthattheygiveatrueandfairview. Theyarealsoresponsiblefor:suchinternal controlastheydetermineisnecessary toenablethepreparationoffinancial statementsthatarefreefrommaterial misstatement,whetherduetofraudor error;assessingtheGroupandparent company’sabilitytocontinueasagoing concern,disclosing,asapplicable,matters relatedtogoingconcern;andusingthe goingconcernbasisofaccountingunless theyeitherintendtoliquidatetheGroupor theparentcompanyortoceaseoperations, orhavenorealisticalternativebuttodoso. Auditor’s responsibilities Ourobjectivesaretoobtainreasonable assuranceaboutwhetherthefinancial statementsasawholearefreefrom materialmisstatement,whetherdueto fraud,otherirregularities,orerror,andto issueouropinioninanauditor’sreport. Reasonableassuranceisahighlevelof assurance,butdoesnotguaranteethatan auditconductedinaccordancewithISAs (UK)willalwaysdetectamaterial misstatementwhenitexists.Misstatements canarisefromfraud,otherirregularities orerrorandareconsideredmaterialif, individuallyorinaggregate,theycould reasonablybeexpectedtoinfluencethe economicdecisionsofuserstakenonthe basisofthefinancialstatements. Afullerdescriptionofourresponsibilities isprovidedontheFRC’swebsiteat www.frc.org.uk/auditorsresponsibilities Irregularities – ability to detect Weidentifiedareasoflawsandregulations thatcouldreasonablybeexpectedtohave amaterialeffectonthefinancialstatements fromourgeneralcommercialandsector experienceandthroughdiscussionwith thedirectorsandothermanagement (asrequiredbyauditingstandards),and frominspectionoftheGroup’sregulatory andlegalcorrespondenceanddiscussed withthedirectorsandothermanagement thepoliciesandproceduresregarding compliancewithlawsandregulations. Wecommunicatedidentifiedlawsand regulationsthroughoutourteamand remainedalerttoanyindicationsof non-compliancethroughouttheaudit. Thisincludedcommunicationfromthe Grouptocomponentauditteamsof relevantlawsandregulationsidentified atgrouplevel. Thepotentialeffectoftheselawsand regulationsonthefinancialstatements variesconsiderably.Firstly,theGroupis subjecttolawsandregulationsthatdirectly affectthefinancialstatementsincluding financialreportinglegislation(including relatedcompanieslegislation),distributable profitslegislationandtaxationlegislation andweassessedtheextentofcompliance withtheselawsandregulationsaspart ofourproceduresontherelatedfinancial statementitems. www.prudential.co.uk AnnualReport2018 Prudential plc 339 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information8 The purpose of our audit work and to whom we owe our responsibilities ThisreportismadesolelytotheCompany’s members,asabody,inaccordancewith Chapter3ofPart16oftheCompaniesAct 2006.Ourauditworkhasbeenundertaken sothatwemightstatetotheCompany’s membersthosematterswearerequired tostatetotheminanauditor’sreportand fornootherpurpose.Tothefullestextent permittedbylaw,wedonotacceptor assumeresponsibilitytoanyoneother thantheCompanyandtheCompany’s members,asabody,forourauditwork, forthisreport,orfortheopinionswe haveformed. Philip Smart Senior Statutory Auditor ForandonbehalfofKPMGLLP, StatutoryAuditor CharteredAccountants London 12March2019 Secondly,theGroupissubjecttomany otherlawsandregulationswherethe consequencesofnon-compliancecould haveamaterialeffectonamountsor disclosuresinthefinancialstatements, forinstancethroughtheimpositionoffines orlitigationorthelossoftheGroup’s licencetooperate.Weidentifiedtheareaof regulatorycapitalasthatmostlikelytohave suchaneffectrecognisingthefinancialand regulatednatureoftheGroup’sactivities. Auditingstandardslimittherequiredaudit procedurestoidentifynon-compliance withtheselawsandregulationstoenquiry ofthedirectorsandothermanagement andinspectionofregulatoryandlegal correspondence,ifany.Theselimited proceduresdidnotidentifyactualor suspectednon-compliance. Owingtotheinherentlimitationsofan audit,thereisanunavoidableriskthat wemaynothavedetectedsomematerial misstatementsinthefinancialstatements, eventhoughwehaveproperlyplanned andperformedourauditinaccordance withauditingstandards.Forexample, thefurtherremovednon-compliancewith lawsandregulationsisfromtheevents andtransactionsreflectedinthefinancial statements,thelesslikelytheinherently limitedproceduresrequiredbyauditing standardswouldidentifyit.Inaddition, aswithanyaudit,thereremainedahigher riskofnon-detectionofirregularities, asthesemayinvolvecollusion,forgery, intentionalomissions,misrepresentations, ortheoverrideofinternalcontrols. Wearenotresponsibleforpreventing non-complianceandcannotbeexpected todetectnon-compliancewithalllaws andregulations. 340 Prudential plc AnnualReport2018 www.prudential.co.uk Independent auditor’s report to the members of Prudential plc only continued06 European Embedded Value (EEV) basis results Index to EEV basis results Page 342 0 1  G  r o u p o v e r v e w i 0 2  i S t r a t e g c  r e p o r t 0 3  G o v e r n a n c e 0 4  D i r e c t o r s ’  r e m u n e r a t i o n  r e p o r t 0 5  i F n a n c i a l  s t a t e m e n t s 0 6    E u r o p e a n E m b e d d e d V a u e  ( E E V )  b a s i s  r e s u l t s l www.prudential.co.uk AnnualReport2018 Prudential plc 341 0 7  A d d i t i o n a l  i n f o r m a t i o n Index to European Embedded Value (EEV) basis results Post-taxoperatingprofitbasedonlonger-terminvestmentreturns Post-taxsummarisedconsolidatedincomestatement Movementinshareholders’equity Summarystatementoffinancialposition Notes on the EEV basis results 1 2 Basisofpreparation Resultsanalysisbybusinessarea 3 Analysisofnewbusinesscontribution 4 Operatingprofitfrombusinessinforce 5 6 Short-termfluctuationsininvestmentreturns Effectofchangesineconomicassumptions 7 Netcorestructuralborrowingsofshareholder-financedbusinesses 8 9 Reconciliationofmovementinshareholders’equity Analysisofmovementinnetworthandvalueofin-forceforlong-termbusiness 10 Analysisofmovementinfreesurplus 11 Expectedtransferofvalueofin-forcebusinessandrequiredcapitaltofreesurplus 12 Sensitivityofresultstoalternativeassumptions 13 Methodologyandaccountingpresentation 14 Assumptions 15 Insurancenewbusinesspremiums 16 ImpactofUStaxreform 17 Corporatetransactions 18 Postbalancesheetevents StatementofDirectors’responsibilities Auditor’sreport Page 343 344 345 346 347 347 348 349 351 352 353 354 356 358 361 361 363 369 373 374 374 374 375 376 Description of EEV basis reporting Inbroadterms,IFRSprofitforlong-termbusinessreflectstheaggregateofresultsonatraditionalaccountingbasis. Bycontrast,EEVisawayofreportingthevalueofthelifeinsurancebusiness. TheEEVbasisresultshavebeenpreparedinaccordancewiththeEEVPrinciplesdatedApril2016,issuedbytheEuropeanInsurance CFOForum.TheEEVPrinciplesprovideconsistentdefinitions,aframeworkforsettingactuarialassumptions,andanapproachtothe underlyingmethodologyanddisclosures. ResultspreparedundertheEEVPrinciplescapturethediscountedvalueoffutureprofitsexpectedtoarisefromthecurrentbookof long-termbusiness.Theresultsarepreparedbyprojectingcashflows,byproduct,usingbestestimateassumptionsforallrelevant factors.Furthermore,indeterminingtheseexpectedprofits,fullallowanceismadefortherisksattachedtotheiremergenceandthe associatedcostofcapital,takingintoaccountrecentexperienceinassessinglikelyfuturepersistency,mortality,morbidityandexpenses. Furtherdetailsareexplainedinnotes13and14. 342 Prudential plc AnnualReport2018 www.prudential.co.uk European Embedded Value (EEV) basis results Post-tax operating profit based on longer-term investment returns Asia operations Newbusiness Businessinforce Long-termbusiness Assetmanagement Total US operations Newbusiness Businessinforce Long-termbusiness Assetmanagement Total UK and Europe operations Newbusiness Businessinforce Long-termbusiness Generalinsurancecommission Totalinsuranceoperations Assetmanagement Total Otherincomeandexpenditure note (i) Restructuringcosts note (ii) Operating profit based on longer-term investment returns Analysed as profit (loss) from: Newbusiness Businessinforce Long-termbusiness Assetmanagementandgeneralinsurancecommission Otherresults Note 2018 £m 2017 £m note(iii) 3 4 3 4 3 4 3 4 2,604 1,783 4,387 159 4,546 921 1,194 2,115 3 2,118 352 1,022 1,374 15 1,389 392 1,781 (726) (156) 7,563 3,877 3,999 7,876 569 (882) 7,563 2,368 1,337 3,705 155 3,860 906 1,237 2,143 7 2,150 342 673 1,015 13 1,028 403 1,431 (746) (97) 6,598 3,616 3,247 6,863 578 (843) 6,598 Notes (i) (ii) (iii) EEVbasisotherincomeandexpenditurerepresentsthepost-taxIFRSbasisresultsforotheroperations(includingGroupandAsiaRegionalHeadOffice,holdingcompany borrowings,AfricaoperationsandPrudentialCapital)lesstheunwindofexpectedmarginsontheinternalmanagementoftheassetsofthecoveredbusiness(asexplained innote13(i)(g)). Restructuringcostscomprisethepost-taxchargerecognisedonanIFRSbasisandtheadditionalamountrecognisedonanEEVbasisfortheshareholders’shareincurredby thewith-profitsfunds,representingthecostofbusinesstransformationandintegration. Thecomparativeresultshavebeenpreparedusingpreviouslyreportedaverageexchangeratesfortheyear. www.prudential.co.uk AnnualReport2018 Prudential plc 343 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationEuropean Embedded Value (EEV) basis results continued Post-tax summarised consolidated income statement Asiaoperations USoperations UKandEuropeoperations Otherincomeandexpenditure Restructuringcosts Operating profit based on longer-term investment returns Short-termfluctuationsininvestmentreturns Effectofchangesineconomicassumptions Marktomarketvaluemovementsoncorestructuralborrowings ImpactofUStaxreform (Loss)profitattachingtocorporatetransactions Totalnon-operating(loss)profit Profit for the year Attributableto: EquityholdersoftheCompany Non-controllinginterests Basic earnings per share Basedonpost-taxoperatingprofitincludinglonger-terminvestmentreturnsafternon-controllinginterests (inpence) Basedonpost-taxprofitattributabletoequityholdersoftheCompany(inpence) Weightedaveragenumberofshares(millions) Note 2018 £m 2017 £m 5 6 16 17 4,546 2,118 1,781 (726) (156) 7,563 (3,219) 146 549 – (451) (2,975) 4,588 4,585 3 4,588 3,860 2,150 1,431 (746) (97) 6,598 2,111 (102) (326) 390 80 2,153 8,751 8,750 1 8,751 2018 2017 293.6p 178.1p 2,575 257.0p 340.9p 2,567 344 Prudential plc AnnualReport2018 www.prudential.co.uk Movement in shareholders’ equity ProfitfortheyearattributabletoequityholdersoftheCompany Itemstakendirectlytoequity: Exchangemovementsonforeignoperationsandnetinvestmenthedges Externaldividends MarktomarketvaluemovementsonJacksonassetsbackingsurplusandrequiredcapital Otherreservemovements Netincreaseinshareholders’equity Shareholders’equityatbeginningofyear Shareholders’ equity at end of year Comprising: Asiaoperations USoperations UKandEuropeoperations Otheroperations Shareholders’ equity at end of year Note 2018 £m 2017 £m 4,585 8,750 1,706 (1,244) (95) 132 5,084 44,698 49,782 8 8 8 (2,045) (1,159) 40 144 5,730 38,968 44,698 Group total 21,592 13,492 13,627 (4,013) 31 Dec 2018 £m 31 Dec 2017 £m Long-term business operations Asset management and other operations Long-term business operations Asset management and other operations Group total 25,132 14,690 13,584 (3,624) 552 40 2,175 (3,624) 24,580 14,650 11,409 – 50,639 21,191 13,257 11,713 – 46,161 401 235 1,914 (4,013) (857) 49,782 (1,463) 44,698 Representing: NetassetsattributabletoequityholdersoftheCompany excludingacquiredgoodwill,holdingcompanynet borrowingsandnon-controllinginterests Acquiredgoodwill* Holdingcompanynetborrowingsatmarketvalue note 7 50,388 251 – 50,639 2,105 1,400 (4,362) 52,493 1,651 (4,362) (857) 49,782 45,917 244 – 46,161 1,562 1,214 (4,239) 47,479 1,458 (4,239) (1,463) 44,698 *Acquiredgoodwillforassetmanagementandotheroperationsfor2018includesgoodwillrecognisedonacquisitionofTMBAssetManagementCo.,Ltd.asdiscussedinnoteD1.2ofthe IFRSstatements. www.prudential.co.uk AnnualReport2018 Prudential plc 345 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationEuropean Embedded Value (EEV) basis results continued Summary statement of financial position Total assets less liabilities, before deduction of insurance funds* Lessinsurancefunds: Policyholderliabilities(netofreinsurers’share)andunallocatedsurplusofwith-profitsfunds Lessshareholders’accruedinterestinthelong-termbusiness Lessnon-controllinginterests Total net assets attributable to equity holders of the Company Sharecapital Sharepremium IFRSbasisshareholders’reserves TotalIFRSbasisshareholders’equity AdditionalEEVbasisretainedprofit Total EEV basis shareholders’ equity *IncludingliabilitiesinrespectofinsuranceproductsclassifiedasinvestmentcontractsunderIFRS4. Net asset value per share Note 31 Dec 2018 £m 31 Dec 2017 £m 431,269 434,615 (414,002) 32,533 (381,469) (18) (418,521) 28,611 (389,910) (7) 49,782 44,698 130 1,964 15,155 17,249 32,533 49,782 129 1,948 14,010 16,087 28,611 44,698 8 8 8 8 8 BasedonEEVbasisshareholders’equityof£49,782million(31December2017:£44,698million)(inpence) Numberofissuedsharesatyearend(millions) 1,920p 2,593 1,728p 2,587 31 Dec 2018 31 Dec 2017 Annualised return on embedded value* 17% 17% *AnnualisedreturnonembeddedvalueisbasedonEEVpost-taxoperatingprofitafternon-controllinginterests,asapercentageofopeningEEVbasisshareholders’equity. Thesupplementaryinformationonpages343to374wasapprovedbytheBoardofDirectorson12March2019. Paul Manduca Chairman Mike Wells Group Chief Executive Mark FitzPatrick Chief Financial Officer 346 Prudential plc AnnualReport2018 www.prudential.co.uk Notes on the EEV basis results 1 Basis of preparation TheEEVbasisresultshavebeenpreparedinaccordancewiththeEEVPrinciplesdatedApril2016,issuedbytheEuropeanInsurance CFOForum.Whereappropriate,theEEVbasisresultsincludetheeffectsofadoptionofEU-endorsedIFRS. ThedirectorsareresponsibleforthepreparationofthesupplementaryinformationinaccordancewiththeEEVPrinciples.The2017 resultshavebeenderivedfromtheEEVbasisresultssupplementtotheCompany’sstatutoryaccountsfor2017. AdetaileddescriptionoftheEEVmethodologyandaccountingpresentationisprovidedinnote13. 2 Results analysis by business area The2017comparativeresultsareshownbelowonbothactualexchangerates(AER)andconstantexchangerates(CER)bases.The2017 CERcomparativeresultsaretranslatedat2018averageexchangerates. Annual premium equivalents (APE) note 15 Asia US UKandEurope Group total Post-tax operating profit Asia operations Newbusiness Businessinforce Long-termbusiness Assetmanagement Total US operations Newbusiness Businessinforce Long-termbusiness Assetmanagement Total UK and Europe operations Newbusiness Businessinforce Long-termbusiness Generalinsurancecommission* Totalinsuranceoperations Assetmanagement Total Otherincomeandexpenditure Restructuringcosts 2018 £m 2017 £m % change Note 3 3,744 1,542 1,516 6,802 AER 3,805 1,662 1,491 6,958 CER 3,671 1,605 1,491 6,767 AER (2)% (7)% 2% (2)% 2018 £m 2017 £m % change Note AER CER AER 3 4 3 4 3 4 2,604 1,783 4,387 159 4,546 921 1,194 2,115 3 2,118 352 1,022 1,374 15 1,389 392 1,781 (726) (156) 2,368 1,337 3,705 155 3,860 906 1,237 2,143 7 2,150 342 673 1,015 13 1,028 403 1,431 (746) (97) 2,282 1,280 3,562 150 3,712 874 1,195 2,069 7 2,076 342 673 1,015 13 1,028 403 1,431 (740) (97) 10% 33% 18% 3% 18% 2% (3)% (1)% (57)% (1)% 3% 52% 35% 15% 35% (3)% 24% 3% (61)% CER 2% (4)% 2% 1% CER 14% 39% 23% 6% 22% 5% 0% 2% (57)% 2% 3% 52% 35% 15% 35% (3)% 24% 2% (61)% Operating profit based on longer-term investment returns 7,563 6,598 6,382 15% 19% www.prudential.co.uk AnnualReport2018 Prudential plc 347 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 2 Results analysis by business area continued Analysed as profit (loss) from: Newbusiness Businessinforce Totallong-termbusiness Assetmanagementandgeneralinsurance commission Otherresults Note 3 4 2018 £m 2017 £m % change AER CER AER CER 3,877 3,999 7,876 569 (882) 7,563 3,616 3,247 6,863 578 (843) 6,598 3,498 3,148 6,646 573 (837) 6,382 7% 23% 15% (2)% (5)% 15% 11% 27% 19% (1)% (5)% 19% *Themajorityofthegeneralinsurancecommissionisnotexpectedtorecurinfutureyears. Post-tax profit Operatingprofitbasedonlonger-term investmentreturns Short-termfluctuationsininvestmentreturns Effectofchangesineconomicassumptions Marktomarketvaluemovementsoncore structuralborrowings ImpactofUStaxreform (Loss)profitattachingtocorporatetransactions Totalnon-operating(loss)profit Profit for the year Basic earnings per share Basedonpost-taxoperatingprofitincluding longer-terminvestmentreturnsafter non-controllinginterests(inpence) Basedonpost-taxprofitattributabletoequity holdersoftheCompany(inpence) 2018 £m 2017 £m % change Note AER CER AER CER 5 6 16 17 7,563 (3,219) 146 549 – (451) (2,975) 4,588 6,598 2,111 (102) (326) 390 80 2,153 8,751 6,382 2,057 (91) (326) 376 77 2,093 8,475 15% 19% (48)% (46)% 2018 2017 % change AER CER AER CER 293.6p 257.0p 248.6p 14% 18% 178.1p 340.9p 330.2p (48)% (46)% 3 Analysis of new business contribution (i) Group summary for long-term business operations Asia note (ii) US UKandEurope Total 2018 Annual premium equivalents (APE) note15 £m Present value of new business premiums (PVNBP) note15 £m 3,744 1,542 1,516 6,802 20,754 15,423 14,073 50,250 New business contribution New business margin APE PVNBP £m 2,604 921 352 3,877 % 70 60 23 57 % 12.5 6.0 2.5 7.7 348 Prudential plc AnnualReport2018 www.prudential.co.uk Asia note (ii) US UKandEurope Total 2017 Annual premium equivalents (APE) note15 £m Present value of new business premiums (PVNBP) note15 £m 3,805 1,662 1,491 6,958 20,405 16,622 13,784 50,811 New business contribution New business margin APE PVNBP £m 2,368 906 342 3,616 % 62 55 23 52 % 11.6 5.5 2.5 7.1 Note Afterallowingforforeignexchangeeffectsof£(118)million,thenewbusinesscontributionhasincreasedby£379milliononaCERbasis.Theincreaseisdrivenbyabeneficialeffectof pricing,productmixandotheractionsof£278millionreflectingourstrategicemphasisonincreasingsalesfromhealthandprotectionbusinessinAsia,togetherwithchangesinlong-term interestratesandothereconomicassumptions(£83million)andhighersalesvolumes(acontributionof£18million). (ii) Asia new business contribution by business unit China HongKong Indonesia Taiwan Other Total 4 Operating profit from business in force (i) Group summary for long-term business operations Unwindofdiscountandotherexpectedreturns Effectofchangesinoperatingassumptions Experiencevariancesandotheritems Grouptotal Unwindofdiscountandotherexpectedreturns Effectofchangesinoperatingassumptions Experiencevariancesandotheritems Grouptotal 2018 £m 2017 £m 149 1,729 122 46 558 2,604 AER 133 1,535 174 57 469 2,368 2018 £m US note(iii) 881 115 198 UK and Europe note(iv) 474 330 218 1,194 1,022 2017 £m US note(iii) 694 196 347 1,237 UK and Europe note(iv) 465 195 13 673 Asia note(ii) 1,218 342 223 1,783 Asia note(ii) 1,007 241 89 1,337 Note Themovementinoperatingprofitfrombusinessinforceof£752millionfrom£3,247millionfor2017to£3,999millionfor2018comprises: Movementinunwindofdiscountandotherexpectedreturns: Growthinopeningvalueofin-forcebusiness Effectofinterestratesandothereconomicassumptions Foreignexchangemovements Movementineffectofchangesinoperatingassumptions,experiencevariancesandotheritems Netmovementinoperatingprofitfrombusinessinforce CER 131 1,474 158 56 463 2,282 Group Total 2,573 787 639 3,999 Group Total 2,166 632 449 3,247 £m 368 101 (62) 407 345 752 www.prudential.co.uk AnnualReport2018 Prudential plc 349 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 4 Operating profit from business in force continued (ii) Asia Unwindofdiscountandotherexpectedreturns note (a) Effectofchangesinoperatingassumptions note (b) Experiencevariancesandotheritems note (c) Total 2018 £m 2017 £m 1,218 342 223 1,783 1,007 241 89 1,337 Notes (a) (b) (c) The£211millionincreaseinunwindofdiscountandotherexpectedreturnsfrom£1,007millionin2017to£1,218millionin2018isprimarilydrivenbythegrowthinthein-force bookandapositive£51millionimpactfrommovementsinlong-terminterestratesandothereconomicassumptions,partiallyoffsetbyanegativeeffectofforeignexchange movementsof£(38)million. Theeffectsofchangesinoperatingassumptionsof£342millionreflectstheoutcomefromtheannualreviewofpersistency,claimsandexpenseexperiencetogetherwiththe benefitofmedicalrepricingmanagementactions.Italsoreflectsprofitsarisingafterreflectionofanumberoftaxchangesacrossanumberofcountries. The£223millioneffectofexperiencevariancesandotheritemsin2018isdrivenbypositivemortalityandmorbidityexperiencesinanumberoflocalbusinessunits,together withpositivepersistencyvariancesfromparticipatingandhealthandprotectionproducts. (iii) US Unwindofdiscountandotherexpectedreturns note (a) Effectofchangesinoperatingassumptions note (b) Experiencevariancesandotheritems: Spreadexperiencevariance Amortisationofinterest-relatedrealisedgainsandlosses Other note (c) Total 2018 £m 2017 £m 881 115 39 92 67 198 694 196 71 91 185 347 1,194 1,237 Notes (a) The£187millionincreaseinunwindofdiscountandotherexpectedreturnsfrom£694millionin2017to£881millionin2018reflectspriorperiodgrowthinthein-forcebook, a£30millionbenefitfroma30basispointincreaseintheUS10-yeartreasuryyieldintheyearoffsetbya£(24)millionnegativeeffectforforeignexchangemovements. Theeffectofoperatingassumptionchangesof£115million(2017:£196)millionmainlyrelatestoroutineupdatesforpersistencyandpolicyholderutilisation. (b) (c) Otherexperiencevariancesof£198millionincludetheeffectsofpositivemortalityandpersistencyexperienceintheyear. (iv) UK and Europe Unwindofdiscountandotherexpectedreturns note (a) Changeinlongevityassumptionbasis note (b) Otheritems note (c) Total 2018 £m 2017 £m 474 330 218 1,022 465 195 13 673 Notes (a) (b) Unwindofdiscountandexpectedreturnsfor2018isbroadlyconsistentwith2017andreflectsthebenefitfroma10basispointincreaseinthe15-yearswapyieldsoffsetbythe impactfromthereinsuranceofpartofitsshareholderannuityportfoliotoRothesayLifeasdiscussedinnote17. Thecreditof£330million(2017:£195million)relatestochangestoannuitantmortalityassumptionstoreflectcurrentmortalityexperience,whichhasshownaslowdowninlife expectancyimprovementsinrecentperiods,andtheadoptionoftheContinuousMortalityInvestigation(CMI)2016model(2017:CMI2015)modelasthebasisforfuture mortalityimprovements. (c) Otheritemscomprisethefollowing: Longevityreinsurance Impactofspecificmanagementactionstoimprovesolvencyposition Provisionforcostofundertakingpastnon-advisedannuitysalesreviewandrelatedredress note (d) Insurancerecoveriesinrespectoftheabovecosts note (d) Provisionforguaranteedminimumpensionequalisation note (e) Other 2018 £m 2017 £m – 141 – 138 (48) (13) 218 (6) 127 (187) – – 79 13 (d) (e) TheUKbusinesshasagreedwiththeFinancialConductAuthority(FCA)toreviewannuitiessoldwithoutadviceafter1July2008toitscontract-baseddefinedcontribution pensioncustomers.Agrossprovisionof£(330)million,post-taxandbeforecostsincurred,wasestablishedat31December2017,ofwhich£(187)millionwaschargedinfullyear 2017.During2018,theGroupagreedwithitsprofessionalindemnityinsurersthattheywillmeet£166millionoftheGroup’sclaimscosts,whichwillbepaidastheGroupincurs costs/redress.ThishasbeenrecognisedontheGroupbalancesheetat31December2018andapost-taxcreditof£138millionisrecognisedintheEEVoperatingprofit.Formore details,refertonoteC11oftheIFRSfinancialstatements. AnallowancehasbeenmadeforhigherliabilitiesthatmayarisewhenapplyingtherecentHighCourtdecisiontoequaliseguaranteedminimumpension(GMP)benefitsbetween malesandfemalesforcertainpensionproductssoldbytheUKbusiness. 350 Prudential plc AnnualReport2018 www.prudential.co.uk 5 Short-term fluctuations in investment returns (i) Group summary Asiaoperations note (ii) USoperations note (iii) UKandEuropeoperations note (iv) Otheroperations Grouptotal (ii) Asia operations HongKong Singapore Other Total 2018 £m 2017 £m (1,029) (1,481) (721) 12 (3,219) 887 582 621 21 2,111 2018 £m 2017 £m (552) (233) (244) (1,029) 531 126 230 887 Note For2018,thechargeof£(1,029)millionmainlyrepresentsthereductionofbondandequityvaluesinHongKongandlowerthanexpectedinvestmentreturnsonparticipatingand unit-linkedbusinessinIndonesia,SingaporeandMalaysia. (iii) US operations Investmentreturnrelatedexperienceonfixedincomesecurities note (a) Investmentreturnrelatedimpactduetochangedexpectationofprofitsonin-force variableannuitybusinessinfutureperiodsbasedoncurrentyear separateaccountreturn,netofrelatedhedgingactivityandotheritems note (b) Total 2018 £m 2017 £m 60 (46) (1,541) (1,481) 628 582 Notes (a)    (b)  Thenetresultrelatingtofixedincomesecuritiesreflectsanumberofoffsettingitemsasfollows: – Theimpactonportfolioyieldsofchangesintheassetportfoliointheyear; – Thedifferencebetweenactualrealisedgainsandlossesandtheamortisationofinterest-relatedrealisedgainsandlossesthatisrecordedwithinoperatingprofit;and – Creditexperience(versusthelonger-termassumption). Thisitemreflectsthenetimpactof: – Changesinprojectedfuturefeesandfuturebenefitcostsarisingfromthedifferencebetweentheactualgrowthinseparateaccountassetvaluesofnegative(5.4)percentand thatassumedof6.2percent(2017:actualgrowthof17.5percentcomparedtoassumedgrowthof5.9percent);and  – Relatedhedgingactivityarisingfromrealisedandunrealisedgainsandlossesonequity-relatedhedgesandinterestrateoptions,andotheritems. (iv) UK and Europe operations Insuranceoperations: Shareholder-backedannuitybusiness With-profitsandotherbusiness Assetmanagement Total 2018 £m 2017 £m (151) (557) (13) (721) 387 229 5 621 Note The£(721)millionfluctuationin2018primarilyrepresentstheimpactofachievinga(2.5)percentpre-taxreturnonthewith-profitsfund(includingunallocatedsurplus)comparedto theassumedrateofreturnof4.2percent(2017:achievedreturnof9percentcomparedtoassumedrateof5percent),partiallyoffsetbytheeffectofapartialhedgeoffutureshareholder transfersexpectedtoemergefromtheUK’swith-profitssub-fundenteredintotoprotectfutureshareholderwith-profittransfersfrommovementsintheUKequitymarket.Italsoreflects lossesoncorporatebondsbackingshareholderannuitybusiness,reflectingchangestointerestratesandcreditspreadsovertheperiod. www.prudential.co.uk AnnualReport2018 Prudential plc 351 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 6 Effect of changes in economic assumptions (i) Group summary for long-term business operations Asia note (ii) US note (iii) UKandEurope note (iv) Grouptotal (ii) Asia HongKong Indonesia Malaysia Singapore Other Total 2018 £m 2017 £m 115 197 (166) 146 (95) (136) 129 (102) 2018 £m 2017 £m 165 (94) (19) 70 (7) 115 (321) 81 59 131 (45) (95) Note Thepositiveeffectin2018of£115millionlargelyarisesfrommovementsinlong-terminterestrates,resultinginhigherassumedfundearnedratesinHongKongandSingapore,partially offsetbytheimpactofvaluingfutureprofitsforhealthandprotectionbusinessathigherdiscountratesinIndonesiaandMalaysia. (iii) US Variableannuitybusiness Fixedannuityandothergeneralaccountbusiness Total 2018 £m 2017 £m 365 (168) 197 (101) (35) (136) Note For2018,thecreditof£197millionmainlyreflectstheincreaseintheassumedseparateaccountreturnfollowingthe30basispointsincreaseintheUS10-yeartreasuryyieldovertheyear, resultinginhigherprojectedfeeincomeandadecreaseinprojectedbenefitcostsforvariableannuitybusiness.Forfixedannuityandothergeneralaccountbusiness,theimpactreflects theeffectonthepresentvalueoffutureprojectedspreadincomefromthecombinedincreaseininterestratesandcreditspreadsintheyear.InJune2018,theNationalAssociationof InsuranceCommissioners(NAIC)formallyapprovedchangestoRBCcapitalfactorsthatreflectedtheDecember2017UStaxreform.Consequently,theeffectofchangesineconomic assumptionsfor2018of£197millionincludesanegative£(23)millionimpactresultingfromthesechanges. (iv) UK and Europe Shareholder-backedannuitybusiness With-profitsandotherbusiness Total 2018 £m 2017 £m 1 (167) (166) 28 101 129 Note Thechargeof£(166)millionincludestheimpactofthemovementinexpectedlong-termratesofinvestmentreturn,resultingfrommarketmovementsandchangesintheassetmixinthe year,andriskdiscountrates.Inaddition,theeffectofchangesineconomicassumptionsforwith-profitsandotherbusinessof£(167)millionincludesa£(78)millionchargefortheeffect onlowerfundearnedratesonequitiesandpropertyasaresultofthechangeinUKindexationofcapitalgainsruleseffectivefrom1January2018. 352 Prudential plc AnnualReport2018 www.prudential.co.uk 7 Net core structural borrowings of shareholder-financed businesses Holdingcompany(includingcentralfinance subsidiaries)cashandshort-term investments Centralfunds Subordinateddebt Seniordebt Bankloan Holdingcompanynetborrowings PrudentialCapitalbankloan Jacksonsurplusnotes Grouptotal 31 Dec 2018 £m Mark to market value adjustment IFRS basis EEV basis at market value 31 Dec 2017 £m Mark to market value adjustment IFRS basis (3,236) – (3,236) (2,264) 6,676 517 7,193 275 4,232 – 196 4,428 (44) 174 130 – 130 – 53 183 6,632 691 7,323 275 4,362 – 249 4,611 5,272 549 5,821 – 3,557 275 184 4,016 – 515 167 682 – 682 – 61 743 EEV basis at market value (2,264) 5,787 716 6,503 – 4,239 275 245 4,759 Note InOctober2018,theCompanyissuedthreetranchesofsubstitutablecorestructuralborrowingsaspartoftheprocessrequiredbeforedemerger,torebalancedebtacross M&GPrudentialandPrudentialplc.Totalproceeds,netofcosts,were£1,630million.InDecember2018,theCompanypaid£434milliontoredeemitsUS$550million7.75percentTier1 perpetualsubordinatednotes.ThemovementinthevalueofcorestructuralborrowingsalsoincludesforeignexchangeeffectsforUSdollardenominateddebts.Formoredetailsonthe corestructuralborrowings,refertonoteC6.1oftheIFRSfinancialstatement. www.prudential.co.uk AnnualReport2018 Prudential plc 353 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 8 Reconciliation of movement in shareholders’ equity Long-termbusiness: Newbusiness note 3 Businessinforce note 4 Assetmanagementandgeneralinsurancecommission Restructuringcosts Otherresults Operating profit based on longer-term investment returns Non-operatingitems Non-controllinginterests Profit for the year attributable to equity holders of the Company Other items taken directly to equity: Exchangemovementsonforeignoperationsandnet investmenthedges Intra-groupdividendsandinvestmentinoperations note (ii) Externaldividends MarktomarketvaluemovementsonJacksonassetsbacking surplusandrequiredcapital Othermovements note (iii) Net increase in shareholders’ equity Shareholders’equityatbeginningofyear Shareholders’ equity at end of year Representing: IFRSbasisshareholders’equity: Netassets(liabilities) Goodwill IFRSbasisshareholders’equity Additionalretainedprofit(loss)onanEEVbasis EEVbasisshareholders’equity Balanceatbeginningofyear: IFRSbasisshareholders’equity: Netassets(liabilities) Goodwill IFRSbasisshareholders’equity Additionalretainedprofit(loss)onanEEVbasis EEVbasisshareholders’equity Asia operations note(i) US operations 2018 £m UK and Europe operations Other operations note(i) 2,604 1,783 4,387 159 (19) – 4,527 (925) (1) 921 1,194 2,115 3 (17) – 2,101 (1,313) – 352 1,022 1,374 407 (109) – 1,672 (1,263) – – – – – (11) (726) (737) 526 (2) Group total note(iv) 3,877 3,999 7,876 569 (156) (726) 7,563 (2,975) (3) 3,601 788 409 (213) 4,585 1,028 (1,177) – – 81 3,533 21,348 24,881 5,921 247 6,168 18,713 24,881 5,620 61 5,681 15,667 21,348 862 (337) – (95) (20) 1,198 13,492 14,690 – (447) – – (5) (43) 13,627 13,584 5,624 – 5,624 9,066 7,547 1,153 8,700 4,884 14,690 13,584 5,248 – 5,248 8,244 7,092 1,153 8,245 5,382 13,492 13,627 (184) 1,961 (1,244) – 76 396 (3,769) (3,373) (3,494) 251 (3,243) (130) (3,373) (3,331) 244 (3,087) (682) (3,769) 1,706 – (1,244) (95) 132 5,084 44,698 49,782 15,598 1,651 17,249 32,533 49,782 14,629 1,458 16,087 28,611 44,698 354 Prudential plc AnnualReport2018 www.prudential.co.uk Notes (i) (ii) Otheroperationsof£(3,373)millionrepresentstheshareholders’equityof£(3,624)millionasshowninthemovementinshareholders’equityandincludesgoodwillof£251million (2017:£244million)relatedtoAsialong-termoperations. Intra-groupdividendsrepresentdividendsthathavebeendeclaredintheyearandinvestmentinoperationsreflectmovementsinsharecapital.Theamountsincludedforthese itemsintheanalysisofmovementinfreesurplus(note10)areaspertheholdingcompanycashflowattransactionrates.Thedifferenceprimarilyrelatestointra-grouploans, foreignexchangeandothernon-cashitems. (iii) Othermovementsincludereservemovementsinrespectoftheshareholders’shareofactuarialgainsandlossesondefinedbenefitpensionschemes,sharecapitalsubscribed, share-basedpaymentsandtreasurysharesandintra-grouptransfersbetweenoperationswhichhavenooveralleffectontheGroup’sembeddedvalue.Alsoincludedistheput optionrecognisedonacquisitionofTMBAssetManagementCo.,Ltd.asdiscussedinnoteD1.2oftheIFRSfinancialstatements. (iv) GrouptotalEEVbasisshareholders’equitycanbefurtheranalysedasfollows: 31 Dec 2018 £m 31 Dec 2017 £m Asset management and general insurance commission Total long-term business operations note9 Other operations note(v) Group total Asset management and general insurance commission Total long-term business operations note9 Other operations note(v) Group total 17,725 2,767 (3,243) 17,249 16,624 2,550 (3,087) 16,087 32,663 50,388 – (130) 2,767 (3,373) 32,533 49,782 29,293 45,917 – 2,550 (682) (3,769) 28,611 44,698 IFRSbasisshareholders’equity Additionalretainedprofit(loss)onan EEVbasis note (v) EEVbasisshareholders’equity (v) TheadditionalretainedlossonanEEVbasisforotheroperationsrepresentsthemarktomarketvalueadjustmentforholdingcompanynetborrowingsofacumulativechargeof £(130)million(31December2017:£(682)million)asshowninnote7. www.prudential.co.uk AnnualReport2018 Prudential plc 355 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 9 Analysis of movement in net worth and value of in-force for long-term business Group Shareholders’equityatbeginningofyear Newbusinesscontribution note 3 Existingbusiness–transfertonetworth Expectedreturnonexistingbusiness note 4 Changesinoperatingassumptionsand experiencevariances note 4 Restructuringcosts Operating profit based on longer-term investment returns Non-operatingitems Profit for the year Exchangemovementsonforeignoperationsand netinvestmenthedges Intra-groupdividendsandinvestmentinoperations Othermovements Shareholders’ equity at end of year Asia Newbusinesscontribution note 3 Existingbusiness–transfertonetworth Expectedreturnonexistingbusiness note 4 Changesinoperatingassumptionsand experiencevariances note 4 Operating profit based on longer-term investment returns Non-operatingitems Profit for the year US Newbusinesscontribution note 3 Existingbusiness–transfertonetworth Expectedreturnonexistingbusiness note 4 Changesinoperatingassumptionsand experiencevariances note 4 Restructuringcosts Operating profit based on longer-term investment returns Non-operatingitems note (ii) Profit for the year 2018 £m Free surplus Required capital Total net worth Value of in-force business note(i) Total embedded value 6,242 (815) 3,439 201 778 (68) 3,535 (720) 2,815 201 (1,654) (77) 7,527 (488) 1,370 68 62 1,012 (393) 619 (225) 1,462 54 125 (17) 1,399 (812) 587 10,265 619 (776) 195 69 – 107 (730) (623) 206 – – 16,507 (196) 2,663 396 847 (68) 3,642 (1,450) 2,192 407 (1,654) (77) 29,410 4,073 (2,663) 2,177 579 (20) 4,146 (2,008) 2,138 1,465 – – 45,917 3,877 – 2,573 1,426 (88) 7,788 (3,458) 4,330 1,872 (1,654) (77) 9,848 17,375 33,013 50,388 158 (253) 55 185 145 15 160 288 (171) 69 6 – 192 164 356 (330) 1,117 123 2,934 (1,117) 1,095 247 318 1,157 (378) 779 63 1,291 123 131 (17) 1,591 (648) 943 3,230 (547) 2,683 858 (1,291) 758 182 – 507 (635) (128) 2,604 – 1,218 565 4,387 (925) 3,462 921 – 881 313 (17) 2,098 (1,283) 815 356 Prudential plc AnnualReport2018 www.prudential.co.uk 2018 £m Free surplus Required capital Total net worth Value of in-force business note(i) Total embedded value UK and Europe Newbusinesscontribution note 3 Existingbusiness–transfertonetworth Expectedreturnonexistingbusiness note 4 Changesinoperatingassumptionsand experiencevariances note 4 Restructuringcosts Operating profit based on longer-term investment returns Non-operatingitems Profit for the year (102) 607 79 591 (51) 1,124 485 1,609 173 (352) 71 (122) – (230) (909) (1,139) 71 255 150 469 (51) 894 (424) 470 281 (255) 324 79 (20) 409 (826) (417) Notes (i) Thenetvalueofin-forcebusinesscomprisesthevalueoffuturemarginsfromcurrentin-forcebusinesslessthecostofholdingrequiredcapitalforlong-termbusinessas shownbelow: 31 Dec 2018 £m 31 Dec 2017 £m Asia US UK and Europe Total Asia US Valueofin-forcebusinessbeforedeductionof costofcapitalandtimevalueofguarantees Costofcapital Costoftimevalueofguarantees* Netvalueofin-forcebusiness Totalnetworth Total embedded value note 8(iv) 21,867 (566) (981) 20,320 4,009 11,811 (296) (1,446) 10,069 4,581 3,083 (459) – 2,624 8,785 36,761 (1,321) (2,427) 33,013 17,375 24,329 14,650 11,409 50,388 17,539 (588) (186) 16,765 4,182 20,947 10,486 (232) (650) 9,604 3,653 13,257 11,713 UK and Europe 3,648 (607) – 3,041 8,672 352 – 474 548 (71) 1,303 (1,250) 53 Total 31,673 (1,427) (836) 29,410 16,507 45,917 *Thecostoftimevalueofguaranteesarisesfromthevariabilityofeconomicoutcomesinthefutureandis,whereappropriate,calculatedasthedifferencebetweenafullstochastic valuationandasingledeterministicvaluationasdescribedinnote13(i)(d).Bothvaluationsreflectthelevelofpolicyholderbenefits(includingguaranteedbenefitsanddiscretionary bonuses)andassociatedcharges,togetherwithmanagementactionsinresponsetoemerginginvestmentandfundsolvencyconditions.Theincreaseinthecostoftimevalueof guaranteesforAsiaoperationsfrom£(186)millionat31December2017to£(981)millionat31December2018reflectstheinteractionbetweentheseeffectsonthetwovaluationsat therespectivelevelofinterestratesandequitymarkets,aswellasgrowthinthebusinessovertheyear.TheincreaseinthecostoftimevalueofguaranteesfortheUSoperationsfrom £(650)millionat31December2017to£(1,446)millionat31December2018primarilyreflectsthereductioninUSequitymarketsduringthefourthquarterof2018. (ii) InJune2018,theNationalAssociationofInsuranceCommissioners(NAIC)formallyapprovedchangestoRBCcapitalfactorsthatreflectedtheDecember2017UStaxreform. The2018EEVresultsreflectthesechanges,witharesultingincreaseinrequiredcapitalandacorrespondingreductioninfreesurplusof£(165)million. www.prudential.co.uk AnnualReport2018 Prudential plc 357 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 10 Analysis of movement in free surplus ForEEVcoveredbusiness,freesurplusistheexcessoftheregulatorybasisnetassetsforEEVreportingpurposes(networth)overthe capitalrequiredtosupportthecoveredbusiness.Whereappropriate,adjustmentsaremadetothenetworthsothatbackingassetsare includedatfairvalueratherthancostsoastocomplywiththeEEVPrinciples.InAsiaandtheUSoperations,assetsdeemedtobe inadmissibleonlocalregulatorybasisareincludedinnetworthwhereconsideredfullyrecognisableonanEEVbasis.Freesurplusfor assetmanagementoperationsandtheUKgeneralinsurancecommissionistakentobeIFRSbasispost-taxearningsandshareholders’ equitynetofgoodwill.Freesurplusforotheroperations(includingGroupandAsiaRegionalHeadOffice,holdingcompanyborrowings, AfricaoperationsandPrudentialCapital)istakentobeEEVbasispost-taxearningsandshareholders’equitynetofgoodwill,with subordinateddebtrecordedasfreesurplustotheextentthatitisclassifiedasavailablecapitalunderSolvencyII. (i) Underlying free surplus generated – insurance and asset management operations The2017comparativeresultsareshownbelowonbothactualexchangerates(AER)andconstantexchangerates(CER)bases.The2017 CERcomparativeresultsaretranslatedat2018averageexchangerates. Asia operations Underlyingfreesurplusgeneratedfromin-forcelifebusiness Investmentinnewbusiness note (iii)(a) Long-termbusiness Assetmanagement Total US operations Underlyingfreesurplusgeneratedfromin-forcelifebusiness Investmentinnewbusiness note (iii)(a) Long-termbusiness Assetmanagement Total UK and Europe operations Underlyingfreesurplusgeneratedfromin-forcelifebusiness Investmentinnewbusiness note (iii)(a) Long-termbusiness Generalinsurancecommission Totalinsuranceoperations Assetmanagement Total Underlying free surplus generated from insurance and asset management operations before restructuring costs Restructuringcosts Underlying free surplus generated from insurance and asset management operations 2018 £m 2017 £m % change AER CER AER CER 1,500 (488) 1,012 159 1,171 1,641 (225) 1,416 3 1,419 1,277 (102) 1,175 15 1,190 392 1,582 1,407 (484) 923 155 1,078 1,575 (254) 1,321 7 1,328 1,343 (466) 877 150 1,027 1,520 (245) 1,275 7 1,282 1,070 (175) 1,070 (175) 895 13 908 403 895 13 908 403 1,311 1,311 7% (1)% 10% 3% 9% 4% 11% 7% (57)% 7% 19% 42% 31% 15% 31% (3)% 21% 12% (5)% 15% 6% 14% 8% 8% 11% (57)% 11% 19% 42% 31% 15% 31% (3)% 21% 4,172 (125) 3,717 (77) 3,620 (77) 12% (62)% 15% (62)% 4,047 3,640 3,543 11% 14% 358 Prudential plc AnnualReport2018 www.prudential.co.uk Representing: Expectedin-forcecashflows(includingexpectedreturn onnetassets) Effectsofchangesinoperatingassumptions,operating experiencevariancesandotheritemsbefore restructuringcosts Underlyingfreesurplusgeneratedfromin-forcelifebusiness beforerestructuringcosts Investmentinnewbusiness note (iii)(a) Totallong-termbusiness Assetmanagementandgeneralinsurancecommission Restructuringcosts (ii) Underlying free surplus generated – Group total Underlyingfreesurplusgeneratedfrom insuranceandassetmanagementoperations note (i) Otherincomeandexpenditure Grouptotal (iii) Movement in free surplus 2018 £m 2017 £m % change AER CER AER CER 3,640 3,417 3,315 7% 10% 778 635 618 23% 26% 4,418 (815) 3,603 569 (125) 4,047 4,052 (913) 3,139 578 (77) 3,640 3,933 (886) 3,047 573 (77) 3,543 9% 11% 15% (2)% (62)% 11% 12% 8% 18% (1)% (62)% 14% 2018 £m 2017 £m % change AER CER AER CER 4,047 (737) 3,310 3,640 (756) 2,884 3,543 (750) 2,793 11% 3% 15% 14% 2% 19% Underlyingfreesurplusgeneratedbefore restructuringcosts Restructuringcosts Underlyingfreesurplusgenerated notes (i)(ii) Non-operatingitems note (b) Netcashflowstoparentcompany note (c) Externaldividends Exchangeratemovements,timingdifferences andotheritems note (d) Net movement in free surplus Balanceatbeginningofyear Balance at end of year Asia operations US operations 1,171 (19) 1,152 (393) 759 (699) – (496) (436) 2,470 2,034 1,419 (17) 1,402 (842) 560 (342) – 21 239 1,928 2,167 2018 £m UK and Europe operations Total insurance and asset management operations 1,582 (89) 1,493 472 1,965 (691) – 239 1,513 3,180 4,693 4,172 (125) 4,047 (763) 3,284 (1,732) – (236) 1,316 7,578 8,894 Other operations Group total (726) (11) (737) (22) (759) 1,732 (1,244) 1,505 1,234 1,774 3,008 3,446 (136) 3,310 (785) 2,525 – (1,244) 1,269 2,550 9,352 11,902 www.prudential.co.uk AnnualReport2018 Prudential plc 359 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 10 Analysis of movement in free surplus continued (iii) Movement in free surplus continued Underlyingfreesurplusgeneratedbefore restructuringcosts Restructuringcosts Underlyingfreesurplusgenerated notes(i)(ii) Non-operatingitems note (b) Netcashflowstoparentcompany note (c) Externaldividends Exchangeratemovements,timingdifferences andotheritems note (d) Net movement in free surplus Balanceatbeginningofyear Balance at end of year Asia operations US operations 2017 £m UK and Europe operations Total insurance and asset management operations Other operations Group total 1,078 (14) 1,064 330 1,394 (645) – (421) 328 2,142 2,470 1,328 – 1,328 (1,203) 125 (475) – (140) (490) 2,418 1,928 1,311 (63) 1,248 572 1,820 (668) – 22 1,174 2,006 3,180 3,717 (77) 3,640 (301) 3,339 (1,788) – (539) 1,012 6,566 7,578 (746) (10) (756) 27 (729) 1,788 (1,159) 226 126 1,648 1,774 2,971 (87) 2,884 (274) 2,610 – (1,159) (313) 1,138 8,214 9,352 Freesurplusinvestedinnewbusinessprimarilyrepresentsacquisitioncostsandamountssetasideforrequiredcapital. Notes (a) (b) Non-operatingitemsincludeshort-termfluctuationsininvestmentreturns,theeffectofchangesineconomicassumptionsforlong-termbusinessoperationsandtheeffectof corporatetransactionsasdescribedinnote17.Inaddition,for2018thisincludestheimpactofacapitalmodellingenhancementintheUKandintheUSchangestoRBCfactors followingtheUStaxreform,whichwereformallyapprovedbytheNationalAssociationofInsuranceCommissioners(NAIC)inJune2018.For2017thisincludedtheimpactofUS taxreform(seenote16). Netcashflowstoparentcompanyforlong-termbusinessoperationsreflecttheflowsasincludedintheholdingcompanycashflowattransactionrates. Exchangeratemovements,timingdifferencesandotheritemsrepresent: (c) (d) Exchangeratemovements MarktomarketvaluemovementsonJacksonassets backingsurplusandrequiredcapital Otheritems note (e) Exchangeratemovements MarktomarketvaluemovementsonJacksonassets backingsurplusandrequiredcapital Otheritems note (e) Asia operations US operations 88 – (584) (496) 131 (95) (15) 21 Asia operations US operations (113) – (308) (421) (190) 40 10 (140) 2018 £m UK and Europe operations Total insurance and asset management operations – – 239 239 219 (95) (360) (236) 2017 £m UK and Europe operations Total insurance and asset management operations 6 – 16 22 (297) 40 (282) (539) Other operations (6) – 1,511 1,505 Group total 213 (95) 1,151 1,269 Other operations Group total (13) – 239 226 (310) 40 (43) (313) (e) Otheritemsincludetheeffectofthenetissuanceof£1.2billionofsubordinateddebtforotheroperationsin2018,intra-grouploansandotherintra-grouptransfersbetween operationsandothernon-cashitems. 360 Prudential plc AnnualReport2018 www.prudential.co.uk 11 Expected transfer of value of in-force business and required capital to free surplus Thediscountedvalueofin-forcebusinessandrequiredcapitalforlong-termbusinessoperationscanbereconciledtothe2018and2017 totalemergenceoffreesurplusasfollows:  Requiredcapital note 9 Valueofin-forcebusiness(VIF) note 9 Addback:deductionforcostoftimevalueofguarantees note 9 Otheritems* Totallong-termbusinessoperations 2018 £m 2017 £m 9,848 33,013 2,427 (2,169) 43,119 10,265 29,410 836 (1,371) 39,140 *‘Otheritems’representamountsincorporatedintoVIFwherethereisnodefinitivetimeframeforwhenthepaymentswillbemadeorreceiptsreceived.Inparticular,otheritemsincludethe deductionoftheshareholders’interestinthewith-profitsestate,thevalueofwhichisderivedbyincreasingfinalbonusratessoastoexhausttheestateoverthelifetimeofthein-force with-profitsbusiness.Thisisanassumptiontogiveanappropriatevaluation.Tobeconservativethisitemisexcludedfromtheexpectedfreesurplusgenerationprofilebelow. Cashflowsareprojectedonadeterministicbasisandarediscountedattheappropriateriskdiscountrate.Themodelledcashflowsuse thesamemethodologyunderpinningtheGroup’sEEVreportingandsoaresubjecttothesameassumptionsandsensitivities. ThetablebelowshowshowtheVIFgeneratedbythein-forcebusinessandtheassociatedrequiredcapitalforlong-termbusiness operationsismodelledasemergingintofreesurplusoverfutureyears. Asia US UKandEurope Total Asia US UKandEurope Total 2018 £m Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years 6,276 6,928 2,616 15,820 37% 4,185 4,094 1,713 9,992 23% 2,762 1,771 1,053 5,586 13% 2,053 378 633 3,064 7% 2017 £m 5,399 123 476 5,998 14% 2,657 – 2 2,659 6% Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years 5,583 6,247 3,012 14,842 38% 3,638 3,993 2,066 9,697 25% 2,418 1,697 1,289 5,404 14% 1,655 401 899 2,955 7% 3,845 117 704 4,666 12% 1,553 – 23 1,576 4% 2018 total as shown above 23,332 13,294 6,493 43,119 100% 2017 total as shown above 18,692 12,455 7,993 39,140 100% 12 Sensitivity of results to alternative assumptions (i) Sensitivity analysis – economic assumptions Thetablesbelowshowthesensitivityoftheembeddedvalueasat31December2018and31December2017andthenewbusiness contributionaftertheeffectofrequiredcapitalfor2018and2017forlong-termbusinessoperationsto: — 1percentincreaseinthediscountrates; — 1percentincreaseininterestratesandriskdiscountrates,includingconsequentialchanges(assumedinvestmentreturnsforallasset classes,marketvaluesoffixedinterestassets); — 0.5percentdecreaseininterestratesandriskdiscountrates,includingconsequentialchanges(assumedinvestmentreturnsforall assetclasses,marketvaluesoffixedinterestassets); — 1percentriseinequityandpropertyyields; — 10percentfallinmarketvalueofequityandpropertyassets(embeddedvalueonly); — ThestatutoryminimumcapitallevelincontrasttoEEVbasisrequiredcapital(embeddedvalueonly);and — 5basispointsincreaseinUKlong-termexpecteddefaults. Ineachsensitivitycalculation,allotherassumptionsremainunchangedexceptwheretheyaredirectlyaffectedbytherevised economicconditions. www.prudential.co.uk AnnualReport2018 Prudential plc 361 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 12 Sensitivity of results to alternative assumptions continued (i) Sensitivity analysis – economic assumptions continued New business contribution from long-term business operations New business contribution note 3 Discountrates–1%increase Interestrates–1%increase Interestrates–0.5%decrease Equity/propertyyields–1%rise Long-termexpecteddefaults– 5bpsincrease 2018 £m 2017 £m US 921 (42) 94 (66) 115 – UK and Europe 352 (33) 43 (23) 45 – Total 3,877 (624) (65) (31) 290 Asia 2,368 (477) (103) (59) 130 – – US 906 (34) 124 (85) 130 – UK and Europe 342 (48) 44 (23) 52 (1) Total 3,616 (559) 65 (167) 312 (1) Asia 2,604 (549) (202) 58 130 – Embedded value of long-term business operations 31 Dec 2018 £m 31 Dec 2017 £m Asia US UK and Europe Total Asia US UK and Europe Total Shareholders' equity note 8 24,329 14,650 11,409 50,388 20,947 13,257 11,713 45,917 Discountrates–1%increase Interestrates–1%increase Interestrates–0.5%decrease Equity/propertyyields–1%rise Equity/propertymarketvalues– 10%fall Statutoryminimumcapital Long-termexpecteddefaults– 5bpsincrease (3,292) (1,564) 366 1,041 (473) 110 (513) 119 (273) 1,011 (498) 217 (648) (668) 363 377 (4,453) (2,113) 456 2,429 (461) – (1,432) 327 (2,560) (944) 121 873 (429) 169 (440) 26 (166) 896 (209) 158 (774) (635) 384 425 (479) – (3,774) (1,553) 339 2,194 (1,117) 327 – – (76) (76) – – (135) (135) Thesensitivitiesshownabovearefortheimpactofinstantaneouschangesontheembeddedvalueoflong-termbusinessoperations andincludethecombinedeffectonthevalueofin-forcebusinessandnetassetsatthebalancesheetdatesindicated.Ifthechangein assumptionsshowninthesensitivitiesweretooccur,thentheeffectshownabovewouldberecordedwithintwocomponentsofthe profitanalysisforthefollowingyear,namelytheeffectofeconomicassumptionchangesandshort-termfluctuationsininvestment returns.Inadditiontothesensitivityeffectsshownabove,theothercomponentsoftheprofitforthefollowingyearwouldbecalculated byreferencetothealteredassumptions,forexamplenewbusinesscontributionandunwindofdiscount,togetherwiththeeffectof otherchangessuchasalteredcorporatebondspreads.Inadditionforchangesininterestrates,theeffectshownaboveforJackson wouldalsoberecordedwithinthefairvaluemovementsonassetsbackingsurplusandrequiredcapital,whicharetakendirectlyto shareholders’equity. (ii) Sensitivity analysis – non-economic assumptions Thetablesbelowshowthesensitivityoftheembeddedvalueasat31December2018and31December2017andthenewbusiness contributionaftertheeffectofrequiredcapitalfor2018and2017forlong-termbusinessoperationsto: — 10percentproportionatedecreaseinmaintenanceexpenses(forexamplea10percentsensitivityonabaseassumptionof£10 perannumwouldrepresentanexpenseassumptionof£9perannum); — 10percentproportionatedecreaseinlapserates(forexamplea10percentsensitivityonabaseassumptionof5percentwould representalapserateof4.5percentperannum);and — 5percentproportionatedecreaseinbasemortalityandmorbidityrates(ieincreasedlongevity). 362 Prudential plc AnnualReport2018 www.prudential.co.uk New business contribution from long-term business operations New business contribution note 3 Maintenanceexpenses–10%decrease Lapserates–10%decrease Mortalityandmorbidity–5%decrease 2018 £m 2017 £m Asia 2,604 40 154 70 US 921 11 24 4 UK and Europe 352 2 17 1 Total 3,877 53 195 75 Asia 2,368 38 133 69 US 906 14 24 4 UK and Europe 342 3 20 (2) Total 3,616 55 177 71 Embedded value of long-term business operations 31 Dec 2018 £m 31 Dec 2017 £m Asia US UK and Europe Total Asia US UK and Europe Total Shareholders’ equity note 8 24,329 14,650 11,409 50,388 20,947 13,257 11,713 45,917 Maintenanceexpenses–10%decrease Lapserates–10%decrease Mortalityandmorbidity–5%decrease Changerepresentingeffecton: Lifebusiness Annuities 254 972 835 835 – 178 619 141 196 (55) 80 87 (294) 13 (307) 512 1,678 682 1,044 (362) 213 753 668 668 – 169 659 214 214 – 64 64 (442) 13 (455) 446 1,476 440 895 (455) 13 Methodology and accounting presentation (i) Methodology Overview Theembeddedvalueisthepresentvalueoftheshareholders’interestintheearningsdistributablefromassetsallocatedtocovered businessaftersufficientallowancehasbeenmadefortheaggregaterisksinthatbusiness.Theshareholders’interestintheGroup’s long-termbusinesscomprises: — Thepresentvalueoffutureshareholdercashflowsfromin-forcecoveredbusiness(valueofin-forcebusiness),lessdeductionsfor: – Thecostoflocked-inrequiredcapital;and – Thetimevalueofcostofoptionsandguarantees; — Locked-inrequiredcapital;and — Theshareholders’networthinexcessofrequiredcapital(freesurplus). Thevalueoffuturenewbusinessisexcludedfromtheembeddedvalue. Notwithstandingthebasisofpresentationofresultsasexplainedinnote13(ii)(c),nosmoothingofmarketoraccountbalancevalues, unrealisedgainsorinvestmentreturnisappliedindeterminingtheembeddedvalueorprofit.Separately,theanalysisofprofitis delineatedbetweenoperatingprofitbasedonlonger-terminvestmentreturnsandotherconstituentitems,asexplainedinnote13(ii)(a). (a) Covered business TheEEVresultsfortheGrouparepreparedfor‘coveredbusiness’,asdefinedbytheEEVPrinciples.Coveredbusinessrepresentsthe Group’slong-terminsurancebusiness,includingtheGroup’sinvestmentsinjointventureandassociateinsuranceoperations,forwhich thevalueofnewandin-forcecontractsisattributabletoshareholders.Thepost-taxEEVbasisresultsfortheGroup’scoveredbusiness arethencombinedwiththepost-taxIFRSbasisresultsoftheGroup’sassetmanagementandotheroperations(includingGroupandAsia RegionalHeadOffice,holdingcompanyborrowings,AfricaoperationsandPrudentialCapital).UndertheEEVPrinciples,theresultsfor coveredbusinessincorporatetheprojectedmarginsofattachinginternalassetmanagement,asdescribedinnote13(i)(g). Thedefinitionoflong-termbusinessoperationscomprisesthosecontractsfallingunderthedefinitionforregulatorypurposes togetherwith,forUSoperations,contractsthatareinsubstancethesameasguaranteedinvestmentcontracts(GICs)butdonotfall withinthetechnicaldefinition. CoveredbusinesscomprisestheGroup’slong-termbusinessoperations,withtwoexceptions: — TheclosedScottishAmicableInsuranceFund(SAIF)whichisexcludedfromcoveredbusiness.SAIFisaring-fencedsub-fundofThe PrudentialAssuranceCompanyLimited(PAC)long-termfund,establishedbyaCourtApprovedSchemeofArrangementinOctober 1997.SAIFisclosedtonewbusinessandtheassetsandliabilitiesofthefundarewhollyattributabletothepolicyholdersofthefund;and — ThepresentationaltreatmentoftheGroup’sprincipaldefinedbenefitpensionscheme,thePrudentialStaffPensionScheme(PSPS). ThepartialrecognitionofthesurplusforPSPSisrecognisedin‘Other’operations. AsmallamountofUKgrouppensionsbusinessisalsonotmodelledforEEVreportingpurposes. www.prudential.co.uk AnnualReport2018 Prudential plc 363 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 13 Methodology and accounting presentation continued (i) Methodology continued (b) Valuation of in-force and new business Theembeddedvalueresultsarepreparedincorporatingbestestimateassumptionsaboutallrelevantfactorsincludinglevelsoffuture investmentreturns,expenses,persistency,mortalityandmorbidity,asdescribedinnote14(vii).Theseassumptionsareusedtoproject futurecashflows.Thepresentvalueofthefuturecashflowsisthencalculatedusingadiscountratewhichreflectsboththetimevalueof moneyandthenon-diversifiablerisksassociatedwiththecashflowsthatarenototherwiseallowedfor. New business IndeterminingtheEEVbasisvalueofnewbusiness,premiumsareincludedinprojectedcashflowsonthesamebasisof distinguishingannualandsinglepremiumbusinessassetoutforstatutorybasisreporting. Newbusinesspremiumsreflectthosepremiumsattachingtocoveredbusiness,includingpremiumsforcontractsclassifiedas investmentproductsforIFRSbasisreporting.Newbusinesspremiumsforregularpremiumproductsareshownonanannualisedbasis. Internalvestingbusinessisclassifiedasnewbusinesswherethecontractsincludeanopenmarketoption. Thepost-taxcontributionfromnewbusinessrepresentsprofitsdeterminedbyapplyingoperatingandeconomicassumptionsasat theendoftheyear.NewbusinessprofitabilityisakeymetricfortheGroup’smanagementofthedevelopmentofthebusiness.In addition,post-taxnewbusinessmarginsareshownbyreferencetoannualpremiumequivalents(APE)andthepresentvalueofnew businesspremiums(PVNBP).ThesemarginsarecalculatedasthepercentageofthevalueofnewbusinessprofittoAPEandPVNBP.APE iscalculatedastheaggregateofregularpremiumsonnewbusinesswrittenintheperiodandone-tenthofsinglepremiums.PVNBPis calculatedastheaggregateofsinglepremiumsandthepresentvalueofexpectedfuturepremiumsfromregularpremiumnewbusiness, allowingforlapsesandtheotherassumptionsmadeindeterminingtheEEVnewbusinesscontribution. Valuation movements on investments WiththeexceptionofdebtsecuritiesheldbyJackson,investmentgainsandlossesduringtheyear(totheextentthatchangesincapital valuesdonotdirectlymatchchangesinliabilities)areincludeddirectlyintheprofitfortheyearandshareholders’equityastheyarise. TheresultsforanycoveredbusinessconceptuallyreflecttheaggregateoftheIFRSresultsandthemovementsontheadditional shareholders’interestrecognisedontheEEVbasis.ThusthestartpointforthecalculationoftheEEVresultsforJackson,asforother businesses,reflectsthemarketvaluemovementsrecognisedonanIFRSbasis. However,indeterminingthemovementsontheadditionalshareholders’interest,thebasisforcalculatingtheEEVresultforJackson acknowledgesthat,fordebtsecuritiesbackingliabilities,theaggregateEEVresultsreflectthefactthatthevalueofin-forcebusiness insteadincorporatesthediscountedvalueoffuturespreadearnings.Thisvalueisnotaffectedgenerallybyshort-termmarket movementsonsecuritiesthat,broadlyspeaking,areheldforthelongerterm. FixedincomesecuritiesbackingthefreesurplusandrequiredcapitalforJacksonareaccountedforatfairvalue.However,consistent withthetreatmentappliedunderIFRSforJacksonsecuritiesclassifiedasavailable-for-sale,movementsinunrealisedappreciation/ depreciationonthesesecuritiesareaccountedforinequityratherthanintheincomestatement,asshowninthemovementin shareholders’equity. (c) Cost of capital Achargeisdeductedfromtheembeddedvalueforthecostoflocked-inrequiredcapitalsupportingtheGroup’slong-termbusiness.The costisthedifferencebetweenthenominalvalueofthecapitalandthediscountedvalueoftheprojectedreleasesofthiscapital,allowing forpost-taxinvestmentearningsonthecapital. Theannualresultisaffectedbythemovementinthiscostfromyeartoyearwhichcomprisesachargeagainstnewbusinessprofitand generallyareleaseinrespectofthereductionincapitalrequirementsforbusinessinforceasthisrunsoff. Whererequiredcapitalisheldwithinawith-profitslong-termfund,thevalueplacedonsurplusassetsinthefundisalready discountedtoreflectitsexpectedreleaseovertimeandnofurtheradjustmentisnecessaryinrespectofrequiredcapital. (d) Financial options and guarantees Nature of financial options and guarantees in Prudential’s long-term business Asia Subjecttolocalmarketcircumstancesandregulatoryrequirements,theguaranteefeaturesdescribedbelowinrespectofUKandEurope businessbroadlyapplytosimilartypesofparticipatingcontractsinAsiawhichareprincipallywritteninHongKong,Singaporeand Malaysia.Participatingproductshavebothguaranteedandnon-guaranteedelements. Therearealsovariousnon-participatinglong-termproductswithguarantees.Theprincipalguaranteesarethoseforwhole-of-life contractswithfloorlevelsofpolicyholderbenefitsthataccrueatratessetatinceptionanddonotvarysubsequentlywithmarket conditions. 364 Prudential plc AnnualReport2018 www.prudential.co.uk US (Jackson) TheprincipalfinancialoptionsandguaranteesinJacksonareassociatedwiththefixedannuity(FA)andvariableannuity(VA)lines ofbusiness. Fixedannuitiesprovidethat,atJackson’sdiscretion,itmayresettheinterestratecreditedtopolicyholders’accounts,subjectto aguaranteedminimum.Theguaranteedminimumreturnvariesfrom1.0percentto5.5percentforbothyears,dependingonthe particularproduct,jurisdictionwhereissued,anddateofissue.At31December2018,88percentoftheaccountvaluesonfixed annuitiesareforpolicieswithguaranteesof3percentorless(31December2017:87percent),andtheaverageguaranteerateis 2.6percentforbothyears. Fixedannuitiesalsopresentariskthatpolicyholderswillexercisetheiroptiontosurrendertheircontractsinperiodsofrapidlyrising interestrates,possiblyrequiringJacksontoliquidateassetsataninopportunetime. Jacksonissuesvariableannuity(VA)contractsforwhichitcontractuallyguaranteestothecontractholder,subjecttospecific conditions,either:a)returnofnolessthantotaldepositsmadetothecontractadjustedforanypartialwithdrawals;b)totaldepositsmade tothecontractadjustedforanypartialwithdrawalsplusaminimumreturn;orc)thehighestcontractvalueonaspecifiedanniversarydate adjustedforanywithdrawalsfollowingthespecifiedcontractanniversary.Theseguaranteesincludebenefitsthatarepayableupon depletionoffunds(GuaranteedMinimumWithdrawalBenefit(GMWB)),asdeathbenefits(GuaranteedMinimumDeathBenefits (GMDB))orasincomebenefits(GuaranteedMinimumIncomeBenefits(GMIB)).Theseguaranteesgenerallyprotectthepolicyholders’ valueintheeventofpoorequitymarketperformance.JacksonhedgestheGMWBandGMDBguaranteesthroughtheuseofequity optionsandfuturescontracts,andessentiallyfullyreinsurestheGMIBguarantees. Jacksonalsoissuesfixedindexannuities(FIA)thatenablepolicyholderstoobtainaportionofanequity-linkedreturnwhileproviding aguaranteedminimumreturn.Theguaranteedminimumreturnsareofasimilarnaturetothosedescribedaboveforfixedannuities. UK and Europe (M&GPrudential) TheonlysignificantfinancialoptionsandguaranteesinM&GPrudential’scoveredbusinessariseinthewith-profitsfund. With-profitsproductsprovidereturnstopolicyholdersthroughbonusesthataresmoothed.Therearetwotypesofbonuses:annual andfinal.Annualbonusesaredeclaredonceayearand,oncecredited,areguaranteedinaccordancewiththetermsoftheparticular product.Finalbonusesareguaranteedonlyuntilthenextbonusdeclaration.TheUKwith-profitsfundalsoheldaprovisionof£49million at31December2018(31December2017:£53million)tohonourguaranteesonasmallnumberofguaranteedannuityoptionproducts. TheGroup’smainexposuretoguaranteedannuityoptionsinM&GPrudentialisthroughthenon-coveredbusinessofSAIF. Aprovisionof£361millionwasheldinSAIFat31December2018(31December2017:£503million)tohonourtheguarantees. Asdescribedinnote13(i)(a),theassetsandliabilitiesarewhollyattributabletothepolicyholdersofthefund.Thereforethemovement intheprovisionhasnodirectimpactonshareholders’funds. Time value Thevalueoffinancialoptionsandguaranteescomprisestwoparts: — Thefirstpartarisesfromadeterministicvaluationonbestestimateassumptions(theintrinsicvalue);and — Thesecondpartarisesfromthevariabilityofeconomicoutcomesinthefuture(thetimevalue). Whereappropriate,afullstochasticvaluationhasbeenundertakentodeterminethetimevalueofthefinancialoptionsandguarantees. Theeconomicassumptionsusedforthestochasticcalculationsareconsistentwiththoseusedforthedeterministiccalculations. Assumptionsspecifictothestochasticcalculationsreflectlocalmarketconditionsandarebasedonacombinationofactualmarketdata, historicmarketdataandanassessmentoflong-termeconomicconditions.CommonprincipleshavebeenadoptedacrosstheGroupfor thestochasticassetmodels,forexample,separatemodellingofindividualassetclassesbutwithanallowanceforcorrelationbetween thevariousassetclasses.Detailsofthekeycharacteristicsofeachmodelaregiveninnotes14(iv),(v)and(vi). Inderivingthetimevalueoffinancialoptionsandguarantees,managementactionsinresponsetoemerginginvestmentandfund solvencyconditionshavebeenmodelled.Managementactionsencompass,butarenotconfinedto,investmentallocationdecisions, levelsofreversionaryandterminalbonusesandcreditedrates.Bonusratesareprojectedfromcurrentlevelsandvariedinaccordance withassumedmanagementactionsapplyingintheemerginginvestmentandfundsolvencyconditions. Inallinstances,themodelledactionsareinaccordancewithapprovedlocalpracticeandthereforereflecttheoptionsactually availabletomanagement.FortheUKwith-profitsfund,theactionsassumedareconsistentwiththosesetoutinthePrinciplesand PracticesofFinancialManagementwhichexplainshowregularandfinalbonusrateswithinthediscretionaryframeworkaredetermined, subjecttothegenerallegislativerequirementsapplicable. www.prudential.co.uk AnnualReport2018 Prudential plc 365 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 13 Methodology and accounting presentation continued (i) Methodology continued (e) Level of required capital InadoptingtheEEVPrinciples,Prudentialhasbasedrequiredcapitalontheapplicablelocalstatutoryregulations,includingany amountsconsideredtoberequiredabovethelocalstatutoryminimumrequirementstosatisfyregulatoryconstraints. Forwith-profitsbusinessinAsiaandtheUK,theavailablecapitalinthefundissufficienttomeetthecapitalrequirements. ForM&GPrudential,aportionoffutureshareholdertransfersexpectedfromthewith-profitsfundisrecognisedwithinnetworth, togetherwiththeassociatedcapitalrequirements. Forshareholder-backedbusiness,thefollowingcapitalrequirementsforlong-termbusinessoperationsapply: — Asia:thelevelofrequiredcapitalhasbeensettoanamountatleastequaltolocalstatutorynotificationrequirements.ForChina operations,thelevelofrequiredcapitalfollowstheapproachforembeddedvaluereportingissuedbytheChinaAssociationof Actuaries(CAA)reflectingtheC-ROSSregime; — US:thelevelofrequiredcapitalhasbeensetat250percentoftherisk-basedcapital(RBC)requiredbytheNationalAssociation ofInsuranceCommissioners(NAIC)attheCompanyActionLevel(CAL);and — UKandEurope:thecapitalrequirementsaresetattheSolvencyIISolvencyCapitalRequirement(SCR)forshareholder-backed businessasawhole.Followingtheannounceddemerger,from1January2018thisdoesnotallowfordiversificationoutsidethe plannedperimeterofthebusinesstobedemerged. (f) With-profits business and the treatment of the estate TheproportionofsurplusallocatedtoshareholdersfromtheUKwith-profitsfundhasbeenbasedonthepresentlevelof10percent. Thevalueattributedtotheshareholders’interestintheestateisderivedbyincreasingfinalbonusrates(andrelatedshareholder transfers)soastoexhausttheestateoverthelifetimeofthein-forcewith-profitsbusiness.Inanyscenarioswherethetotalassetsofthe lifefundareinsufficienttomeetpolicyholderclaimsinfull,theexcesscostisfullyattributedtoshareholders.Similarprinciplesapply, whereappropriate,forotherwith-profitsfundsoftheGroup’sAsiaoperations. (g) Internal asset management Thein-forceandnewbusinessresultsfromlong-termbusinessincludetheprojectedvalueofprofitsorlossesfromassetmanagement andservicecompaniesthatsupporttheGroup’scoveredinsurancebusinesses.TheresultsoftheGroup’sassetmanagementoperations includethecurrentyearprofitsfromthemanagementofbothinternalandexternalfunds.EEVbasisshareholders’otherincomeand expenditureisadjustedtodeducttheunwindoftheexpectedinternalassetmanagementprofitmarginfortheyearasincludedin‘Other operations’.Thedeductionisonabasisconsistentwiththatusedforprojectingtheresultsforcoveredinsurancebusiness.Group operatingprofitaccordinglyincludesthevariancebetweenactualandexpectedprofitinrespectofmanagementoftheassetsfor coveredbusiness. (h) Allowance for risk and risk discount rates Overview UndertheEEVPrinciples,discountratesusedtodeterminethepresentvalueoffuturecashflowsaresetbyreferencetorisk-freerates plusariskmargin. ForAsiaandtheUS,therisk-freeratesarebasedon10-yearlocalgovernmentbondyields.ForUKandEurope,theEEVrisk-freerate isbasedonthefulltermstructureofinterestrates,ieayieldcurve,whichisusedtodeterminetheembeddedvalueattheendofthe reportingperiod. Theriskmarginshouldreflectanynon-diversifiableriskassociatedwiththeemergenceofdistributableearningsthatisnotallowedfor elsewhereinthevaluation.Inordertobetterreflectdifferencesinrelativemarketriskvolatilityinherentineachproductgroup,Prudential setstheriskdiscountratestoreflecttheexpectedvolatilityassociatedwiththecashflowsforeachproductcategoryintheembedded valuemodel,ratherthanataGrouplevel. SincefinancialoptionsandguaranteesareexplicitlyvaluedundertheEEVmethodology,riskdiscountratesunderEEVareset excludingtheeffectoftheseproductfeatures. Theriskmarginrepresentstheaggregateoftheallowanceformarketrisk,additionalallowanceforcreditriskwhereappropriate, andallowancefornon-diversifiablenon-marketrisk.Noallowanceisrequiredfornon-marketriskswheretheseareassumedtobe fullydiversifiable. Market risk allowance Theallowanceformarketriskrepresentsthebetamultipliedbyanequityriskpremium.ExceptforUKshareholder-backedannuity business(asexplainedbelow),suchanapproachhasbeenusedfortheGroup’sbusinesses. Thebetaofaportfolioorproductmeasuresitsrelativemarketrisk.Theriskdiscountratesreflectthemarketriskinherentineach productgroupandhencethevolatilityofproductcashflows.Thesearedeterminedbyconsideringhowtheprofitsfromeachproduct areaffectedbychangesinexpectedreturnsonvariousassetclasses.Byconvertingthisintoarelativerateofreturn,itispossibleto deriveaproduct-specificbeta. Productlevelbetasreflectthemostrecentproductmixtoproduceappropriatebetasandriskdiscountratesforeachmajor productgrouping. 366 Prudential plc AnnualReport2018 www.prudential.co.uk Additional credit risk allowance TheGroup’smethodologyistoallowappropriatelyforcreditrisk.Theallowancefortotalcreditriskistocover: — Expectedlong-termdefaults; — Creditriskpremium(toreflectthevolatilityindowngradeanddefaultlevels);and — Short-termdowngradesanddefaults. Theseallowancesareinitiallyreflectedindeterminingbestestimatereturnsandthroughthemarketriskallowancedescribedabove. However,forthosebusinesseslargelybackedbyholdingsofdebtsecurities,theseallowancesintheprojectedreturnsandmarketrisk allowancesmaynotbesufficientandanadditionalallowancemaybeappropriate. Thepracticalapplicationoftheallowanceforcreditriskvariesdependinguponthetypeofbusinessasdescribedbelow: Asia ForAsia,theallowanceforcreditriskincorporatedintheprojectedratesofreturnandthemarketriskallowanceareconsideredtobe sufficient.Accordingly,noadditionalallowanceforcreditriskisrequired. Theprojectedratesofreturnforholdingsofcorporatebondscomprisetherisk-freerateplusanassessmentoflong-termspreadover therisk-freerate. US (Jackson) ForJacksonbusiness,theallowanceforlong-termdefaultsof0.17percent(31December2017:0.19percent)isreflectedintherisk marginreserve(RMR)chargethatisdeductedindeterminingtheprojectedspreadmarginbetweentheearnedrateontheinvestments andthepolicyholdercreditingrate. Theriskdiscountrateincorporatesanadditionalallowanceforcreditriskpremiumandshort-termdowngradesanddefaults (0.2percentforvariableannuitybusinessand1.0percentfornon-variableannuitybusinessforbothyears),asshowninnote14(ii). Indeterminingthisallowanceanumberoffactorshavebeenconsidered.Thesefactors,inparticular,include: — Howmuchofthecreditspreadondebtsecuritiesrepresentsanincreasedshort-termcreditrisknotreflectedintheRMRlong-term defaultassumptions,andhowmuchisliquiditypremium(whichisthepremiumrequiredbyinvestorstocompensatefortheriskof longer-terminvestmentswhichcannotbeeasilyconvertedintocashatthefairmarketvalue).Inassessingthiseffect,consideration hasbeengiventoanumberofapproachestoestimatingtheliquiditypremiumbyconsideringrecentstatisticaldata;and — PolicyholderbenefitsforJacksonfixedannuitybusinessarenotfixed.Itispossibleinadverseeconomicscenariostopasson acomponentofcreditlossestopolicyholders(subjecttoguaranteefeatures)throughlowerinvestmentreturnscreditedto policyholders.Consequently,itisonlynecessarytoallowforthebalanceofthecreditriskintheriskdiscountrate. Theleveloftheadditionalallowanceisassessedateachreportingperiodtotakeaccountofprevailingcreditconditionsandasthe businessinforcealtersovertime.Theadditionalallowanceforvariableannuitybusinesshasbeensetatone-fifthofthenon-variable annuitybusinesstoreflecttheproportionoftheallocatedholdingsofgeneralaccountdebtsecurities. ThelevelofallowancediffersfromthatforUKannuitybusinessforinvestmentportfoliodifferencesandtotakeaccountofthe managementactionsavailableinadverseeconomicscenariostoreducecreditingratestopolicyholders,subjecttoguaranteefeatures oftheproducts. UK and Europe (M&GPrudential) (1) Shareholder-backed annuity business Forshareholder-backedannuitybusiness,Prudentialhasusedamarketconsistentembeddedvalue(MCEV)approachtoderivean impliedriskdiscountratewhichisthenappliedtotheprojectedbestestimatecashflows. IntheannuityMCEVcalculations,astheassetsaregenerallyheldtomaturitytomatchliabilities,thefuturecashflowsarediscounted usingtheswapyieldcurveplusanallowanceforliquiditypremiumbasedontheSolvencyIIallowanceforcreditrisk.TheSolvencyII allowanceissetbytheEuropeanInsuranceandOccupationalPensionsAuthority(EIOPA)usingaprudentassumptionthatallfuture downgradeswillbereplacedannually,andallowingforthecreditspreadfloor. ForthepurposesofpresentationintheEEVresults,theresultsproducedonthisbasisarereconfigured.Underthisapproachthe projectedearnedrateofreturnonthedebtsecuritiesheldisdeterminedafterallowingforabestestimatecreditriskallowance.The remainingelementsofprudencewithintheSolvencyIIallowanceareincorporatedintotheriskmarginincludedinthediscountrate, showninnote14(iii). (2) With-profits fund non-profit annuity business Fornon-profitannuitybusinessattributabletotheUKwith-profitsfund,thebasisfordeterminingtheaggregateallowanceforcreditrisk isconsistentwiththatappliedforUKshareholder-backedannuitybusiness(asdescribedabove).Theallowanceforcreditriskforthis businessistakenintoaccountindeterminingtheprojectedcashflowsfromthewith-profitsfund,whichareinturndiscountedattherisk discountrateapplicabletoalloftheprojectedcashflowsfromthefund. (3) With-profits fund holdings of debt securities Thewith-profitsfundholdsdebtsecuritiesaspartofitsinvestmentportfoliobackingpolicyholderliabilitiesandunallocatedsurplus. Theassumedearnedrateforwith-profitholdingsofcorporatebondsisdefinedastherisk-freerateplusanassessmentofthelong-term spreadoverriskfree,netofexpectedlong-termdefaults.Thisapproachissimilartothatappliedforequitiesandpropertiesforwhichthe projectedearnedrateisdefinedastherisk-freerateplusalong-termriskpremium. www.prudential.co.uk AnnualReport2018 Prudential plc 367 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 13 Methodology and accounting presentation continued (i) Methodology continued Allowance for non-diversifiable non-market risks Themajorityofnon-marketandnon-creditrisksareconsideredtobediversifiable.Anallowancefornon-diversifiablenon-marketrisksis estimatedassetoutbelow: Abaselevelallowanceof50basispointsisappliedtocoverthenon-diversifiablenon-marketrisksassociatedwiththeGroup’s businesses.FortheGroup’sAsiaoperationsinIndonesia,thePhilippines,Taiwan,ThailandandVietnam,additionalallowancesare appliedforemergingmarketriskrangingfrom100to250basispoints.Theleveloftheseallowancesarereviewedandupdatedbasedon anassessmentofarangeofpre-definedemergingmarketriskindicators,aswellastheGroup’sexposureandexperienceinthebusiness units.At31December2018,theChinaallowancefornon-marketriskwasreducedreflectingthegrowthinthesizeofthebusiness, increasingmanagementexposureandexperienceinthecountryandanimprovementinourriskassessmentofthemarket.Forthe Group’sUSbusinessandUKandEuropebusiness,noadditionalallowanceisnecessary. (i) Foreign currency translation Foreigncurrencyprofitsandlosseshavebeentranslatedataverageexchangeratesfortheyear.Foreigncurrencyassetsandliabilities havebeentranslatedatyear-endexchangerates.TheprincipalexchangeratesareshowninnoteA1oftheIFRSfinancialstatements. (j) Taxation Indeterminingthepost-taxprofitfortheyearforcoveredbusiness,theoveralltaxrateincludestheimpactoftaxeffectsdeterminedon alocalregulatorybasis.Taxpaymentsandreceiptsincludedintheprojectedcashflowstodeterminethevalueofin-forcebusinessare calculatedusingratesthathavebeenannouncedandsubstantivelyenactedbytheendofthereportingperiod. (k) Inter-company arrangements TheEEVresultsforcoveredbusinessincorporateannuitiesestablishedinthePACnon-profitsub-fundfromvestingpensionpoliciesin SAIF(whichisnotcoveredbusiness).TheEEVresultsalsoincorporatetheeffectofthereinsurancearrangementofnon-profitimmediate pensionannuityliabilitiesofSAIFtothePACnon-profitsub-fund. (ii) Accounting presentation (a) Analysis of post-tax profit Totheextentapplicable,thepresentationoftheEEVpost-taxprofitfortheyearisconsistentwiththeclassificationbetweenoperating andnon-operatingresultswiththebasisthattheGroupappliesfortheanalysisofIFRSbasisresults.Operatingresultsreflectunderlying resultsincludinglonger-terminvestmentreturns,whicharedeterminedasdescribedinnote13(ii)(b)andincorporatethefollowing: — Newbusinesscontribution,asdefinedinnote13(i)(b); — Unwindofdiscountonthevalueofin-forcebusinessandotherexpectedreturns,asdescribedinnote13(ii)(c); — Theimpactofroutinechangesofestimatesrelatingtooperatingassumptions,asdescribedinnote13(ii)(d);and — Operatingexperiencevariances,asdescribedinnote13(ii)(e). Non-operatingresultscomprise: — Short-termfluctuationsininvestmentreturns; — Themarktomarketvaluemovementsoncorestructuralborrowings; — Theeffectofchangesineconomicassumptions;and — Theimpactofcorporatetransactionsundertakenintheyear. Inaddition,operatingresultsincludetheeffectofchangesintaxlegislation,unlessthesechangesareone-offandstructuralinnature, suchastheimpactoftheUStaxreformin2017(seenote16),orprimarilyaffectthelevelofprojectedinvestmentreturns,inwhichcase theyarereflectedasanon-operatingresult. Totalprofitattributabletoshareholdersandbasicearningspershareincludetheseitems,togetherwithactualinvestmentreturns. TheGroupbelievesthatoperatingprofit,asadjustedfortheseitems,betterreflectsunderlyingperformance. ForM&GPrudential,theembeddedvalueincorporatesSolvencyIItransitionalmeasures,whicharerecalculatedusingmanagement’s estimateoftheimpactofoperatingandmarketconditionsatthevaluationdate.Theimpactofthisrecalculationisrecordedwithinthe correspondingcomponentoftheanalysisofpost-taxprofit. (b) Investment returns included in operating profit Fortheinvestmentelementoftheassetscoveringthenetworthoflong-terminsurancebusiness,investmentreturnsarerecognisedin operatingresultsattheexpectedlong-termrateofreturn.Theseexpectedreturnsarecalculatedbyreferencetotheassetmixofthe portfolio.Forthepurposeofcalculatingthelonger-terminvestmentreturntobeincludedintheoperatingresultofthewith-profits fundofM&GPrudential,whereassetsbackingtheliabilitiesandunallocatedsurplusaresubjecttomarketvolatility,assetvaluesatthe beginningofthereportingperiodareadjustedtoremovetheeffectsofshort-termmarketmovementsasexplainedinnote13(ii)(c). 368 Prudential plc AnnualReport2018 www.prudential.co.uk Forthepurposeofdeterminingthelong-termreturnsfordebtsecuritiesofUSoperationsforfixedannuityandothergeneralaccount business,ariskmarginreservechargeisincludedwhichreflectstheexpectedlong-termrateofdefaultbasedonthecreditqualityofthe portfolio.ForJackson,interest-relatedrealisedgainsandlossesareamortisedtotheoperatingresultsoverthematurityperiodofthesold bondsandforequity-relatedinvestments,along-termrateofreturnisassumed,whichreflectstheaggregationofend-of-periodrisk-free ratesandtheequityriskpremium.ForUSvariableannuityseparateaccountbusiness,operatingprofitincludestheunwindofdiscount ontheopeningvalueofin-forcebusinessadjustedtoreflectend-of-periodprojectedratesofreturnwiththeexcessordeficitofthe actualreturnrecognisedwithinnon-operatingprofit,togetherwithrelatedhedgingactivity. ForUKannuitybusiness,rebalancingoftheassetportfoliobackingtheliabilitiestopolicyholdersmay,fromtimetotime,takeplaceto alignitmorecloselywiththeinternalbenchmarkofcreditqualitythatmanagementapplies.Suchrebalancingwillresultinachangeinthe projectedyieldontheassetportfolioandtheallowancefordefaultrisk.Theneteffectofthesechangesisincludedintheoperatingresult fortheyear. (c) Unwind of discount and other expected returns TheGroup’smethodologyindeterminingtheunwindofdiscountandotherexpectedreturnsisbyreferenceto: — Thevalueofin-forcebusinessatthebeginningoftheyear(adjustedfortheeffectofcurrentyeareconomicandoperatingassumption changes);and — Requiredcapitalandsurplusassets. Inapplyingthisgeneralapproach,theunwindofdiscountincludedinoperatingprofitforM&GPrudentialisdescribedbelow. M&GPrudential Theunwindisdeterminedbyreferencetoanimpliedsingleriskdiscountrate.TheEEVrisk-freerateisbasedonayieldcurve(assetout innote13(i)(h)),whichisusedtoderiveanimpliedsinglediscountratewhich,ifthisratehadbeenused,wouldreproducethesame embeddedvalueasthatcalculatedbyreferencetotheyieldcurve.Thedifferencebetweentheoperatingprofitdeterminedusingthe singleimplieddiscountrateandthatderivedusingtheyieldcurveisincludedwithinnon-operatingprofit. Forwith-profitsbusiness,theopeningvalueofin-forceisadjustedfortheeffectofshort-terminvestmentvolatilityduetomarket movements(iesmoothed).Inthesummarystatementoffinancialpositionandfortotalprofitreporting,assetvaluesandinvestment returnsarenotsmoothed.At31December2018,theshareholders’interestinthesmoothedsurplusassetsusedforthispurposeonly were£12millionhigher(31December2017:£57millionlower)thanthesurplusassetscarriedinthestatementoffinancialposition. (d) Effect of changes in operating assumptions Operatingprofitincludestheeffectofchangestonon-economicassumptionsonthevalueofin-forceattheendoftheyear.For presentationalpurposestheeffectofchangesisdelineatedtoshowtheeffectontheopeningvalueofin-forceasoperatingassumption changes,withtheexperiencevariancessubsequentlybeingdeterminedbyreferencetotheend-of-yearassumptions(seenote13(ii)(e)). (e) Operating experience variances Operatingprofitincludestheeffectofexperiencevariancesonnon-economicassumptions,suchaspersistency,mortalityandmorbidity, expensesandotherfactors,whicharecalculatedwithreferencetotheend-of-yearassumptions. (f) Effect of changes in economic assumptions Movementsinthevalueofin-forcebusinessatthebeginningoftheyearcausedbychangesineconomicassumptions,netoftherelated changeinthetimevalueofcostofoptionsandguarantees,arerecordedinnon-operatingresults. 14 Assumptions Principal economic assumptions TheEEVbasisresultsfortheGroup’soperationshavebeendeterminedusingeconomicassumptionswherethelong-termexpected ratesofreturnoninvestmentsandriskdiscountratesaresetbyreferencetoyear-endrisk-freeratesofreturn(definedbelowforeachof theGroup’sinsuranceoperations).Expectedreturnsonequityandpropertyassetclassesandcorporatebondsarederivedbyaddinga riskpremium,basedontheGroup’slong-termview,totherisk-freerate. Thetotalprofitthatemergesoverthelifetimeofanindividualcontractascalculatedusingtheembeddedvaluebasisisthesameover timeasthatcalculatedundertheIFRSbasis.Sincetheembeddedvaluebasisreflectsdiscountedfuturecashflows,undertheEEV methodologytheprofitemergenceisadvanced,thusmorecloselyaligningthetimingoftherecognitionofprofitwiththeeffortsandrisks ofcurrentmanagementactions,particularlywithregardtobusinesssoldduringtheyear. www.prudential.co.uk AnnualReport2018 Prudential plc 369 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 14 Assumptions continued Principal economic assumptions continued (i) Asia Therisk-freeratesofreturnforAsiaaredefinedas10-yeargovernmentbondyieldsattheendoftheyear. Risk discount rate % New business In-force business 10-year government bond yield % Expected long-term Inflation % 31 Dec 2018 31 Dec 2017 31 Dec 2018 31 Dec 2017 31 Dec 2018 31 Dec 2017 31 Dec 2018 31 Dec 2017 China HongKong notes (b)(d) Indonesia Malaysia note (d) Philippines Singapore note (d) Taiwan Thailand Vietnam Totalweightedriskdiscountrate note (a) 8.1 4.4 12.4 6.6 14.5 3.4 4.5 10.0 12.6 5.4 9.7 4.1 10.6 6.4 12.7 3.5 4.3 9.8 12.6 5.3 8.1 4.4 12.4 6.6 14.5 4.2 4.4 10.0 12.6 5.8 9.7 4.1 10.6 6.5 12.7 4.4 3.9 9.8 12.6 5.7 3.3 2.7 8.2 4.1 7.0 2.1 0.9 2.5 5.1 3.9 2.4 6.4 3.9 5.2 2.0 0.9 2.3 5.1 3.0 2.5 4.5 2.5 4.0 2.0 1.5 3.0 5.5 3.0 2.5 4.5 2.5 4.0 2.0 1.5 3.0 5.5 Notes (a) (b) (c) (d) TheweightedriskdiscountratesforAsiaoperationsshownabovehavebeendeterminedbyweightingeachmarket’sriskdiscountratesbyreferencetothepost-taxEEVbasis newbusinesscontributionandtheclosingvalueofin-forcebusiness.ThechangesintheriskdiscountratesforindividualAsiabusinessunitsreflectthemovementsin10-year governmentbondyields,changesintheeconomicbasisandchangesinproductmix. ForHongKongtheassumptionsshownareforUSdollardenominatedbusiness.Forotherbusinessunits,theassumptionsareforlocalcurrencydenominatedbusiness. EquityriskpremiumsinAsiarangefrom4.0percentto9.4percent(2017:4.0percentto9.4percent). ThemeanequityreturnassumptionsforthemostsignificantequityholdingsoftheAsiaoperationsare: HongKong Malaysia Singapore (ii) US Therisk-freeratesofreturnfortheUSaredefinedasthe10-yeartreasurybondyieldattheendoftheyear. 31 Dec 2018 % 31 Dec 2017 % 6.7 10.6 8.6 6.4 10.4 8.5 31 Dec 2018 % 31 Dec 2017 % 7.1 0.2 4.4 1.0 6.9 6.8 2.7 0.17 6.7 2.9 4.0 17.5 6.8 0.2 4.1 1.0 6.7 6.5 2.4 0.19 6.4 3.0 4.0 18.0 31 Dec 2018 % 31 Dec 2017 % January to June issues July to December issues January to June issues July to December issues 1.75 2.00 0.50 1.75 2.00 0.50 1.50 1.75 0.50 1.25 1.50 0.50 Riskdiscountrate: Variableannuity: Riskdiscountrate Additionalallowanceforcreditriskincludedinriskdiscountrate note 13(i)(h) Non-variableannuity: Riskdiscountrate Additionalallowanceforcreditriskincludedinriskdiscountrate note 13(i)(h) Weightedaveragetotal: Newbusiness In-forcebusiness US10-yeartreasuryyield Allowanceforlong-termdefaultsincludedinprojectedspread note 13(i)(h) Pre-taxexpectedlong-termnominalrateofreturnforUSequities Expectedlong-termrateofinflation Equityriskpremium S&Pequityreturnvolatility Note Assumednewbusinessspreadmarginsareasfollows: Fixedannuitybusiness*† Fixedindexannuitybusiness* Institutionalbusiness *Theassumedspreadmargingradesuplinearlyby25basispointstoalong-termassumptionoverfiveyears. †Includingtheproportionofvariableannuitybusinessinvestedinthegeneralaccount. 370 Prudential plc AnnualReport2018 www.prudential.co.uk (iii) UK and Europe Therisk-freerateisbasedonthefulltermstructureofinterestrates,ieayieldcurve,whichisusedtodeterminetheembeddedvalueat theendofthereportingperiod.Theseyieldcurvesareusedtoderivepre-taxexpectedlong-termnominalratesofinvestmentreturnand riskdiscountrates.Forthepurposeofdeterminingtheunwindofdiscountintheanalysisofoperatingprofit,theseyieldcurvesareused toderiveasingleimpliedriskdiscountrate,asexplainedinnote13(i)(h). Thissingleimpliedriskdiscountrateisshown,alongwiththe15-yearnominalrateofinvestmentreturnand15-yearrateofinflation basedontheinflationyieldcurve. Shareholder-backed annuity in-force business: note (a) Riskdiscountrate Pre-taxexpected15-yearnominalratesofinvestmentreturn note (c) With-profits and other business: Riskdiscountrate: note (b) Newbusiness In-forcebusiness Pre-taxexpected15-yearnominalratesofinvestmentreturn: note (c) Overseasequities Property 15-yeargiltyield Corporatebonds Expected15-yearrateofinflation Equityriskpremium 31 Dec 2018 % 31 Dec 2017 % 4.7 3.1 4.9 5.0 4.0 2.6 4.7 4.8 6.5 to 10.1 4.4 1.7 3.5 3.6 4.0 6.2to10.1 4.4 1.6 3.4 3.5 4.0 Notes (a) (b) (c) Forshareholder-backedannuitybusiness,themovementsinthepre-taxlong-termnominalratesofreturnandriskdiscountratesreflecttheeffectofchangesinassetyields. Theriskdiscountratesforwith-profitsandotherbusinessshownaboverepresentsaweightedaveragetotaloftheratesappliedtodeterminethepresentvalueoffuturecashflows, includingtheportionoffuturewith-profitsbusinessshareholders’transfersrecognisedinnetworth. ThetablebelowshowsthepatternoftheUKrisk-freeSolvencyIIspotyieldcurveattheendof31December: 31 Dec 2018 31Dec2017 1 year 1.0% 0.6% 5 year 10 year 15 year 20 year 1.2% 0.9% 1.3% 1.2% 1.4% 1.3% 1.5% 1.4% Stochastic assumptions Detailsaregivenbelowofthekeycharacteristicsofthemodelsusedtodeterminethetimevalueofthefinancialoptionsandguarantees asreferredtoinnote13(i)(d). (iv) Asia — ThestochasticcostofguaranteesisprimarilyofsignificancefortheHongKong,Malaysia,SingaporeandTaiwanoperations; — Theprincipalassetclassesaregovernmentandcorporatebonds; — TheassetreturnmodelsaresimilartothemodelsasdescribedforM&GPrudentialbelow;and — Thevolatilityofequityreturnsrangesfrom18percentto35percentforbothyears,andthevolatilityofgovernmentbondyields rangesfrom1.1percentto2.0percent(2017:from1.1percentto2.0percent). (v) US (Jackson) — Interestratesandequityreturnsareprojectedusingalog-normalgeneratorreflectinghistoricalmarketdata; — Corporatebondreturnsarebasedontreasuryyieldsplusaspreadthatreflectscurrentmarketconditions;and — Thevolatilityofequityreturnsrangesfrom17percentto26percent(2017:from18percentto27percent),andthestandard deviationofinterestratesrangesfrom3.4percentto3.7percent(2017:from2.5percentto2.8percent). (vi) UK and Europe (M&GPrudential) — Interestratesareprojectedusingastochasticinterestratemodelcalibratedtothecurrentmarketyields; — Equityreturnsareassumedtofollowalog-normaldistribution; — Thecorporatebondreturniscalculatedbasedonarisk-freereturnplusamean-revertingspread; — Propertyreturnsarealsomodelledbasedonarisk-freereturnplusariskpremiumwithastochasticprocessreflectingtotalproperty returns;and — Thestandarddeviationofequitiesandpropertyrangesfrom14percentto20percentforbothyears. www.prudential.co.uk AnnualReport2018 Prudential plc 371 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 14 Assumptions continued Operating assumptions (vii) Best estimate assumptions Bestestimateassumptionsareusedforthecashflowprojections,wherebestestimateisdefinedasthemeanofthedistributionoffuture possibleoutcomes.Theassumptionsarereviewedactivelyandchangesaremadewhenevidenceexiststhatmaterialchangesinfuture experiencearereasonablycertain. Assumptionsrequiredinthecalculationofthevalueofoptionsandguarantees,forexamplerelatingtovolatilitiesandcorrelations,or dynamicalgorithmslinkingliabilitiestoassets,havebeensetequaltothebestestimatesand,wherevermaterialandpractical,reflectany dynamicrelationshipsbetweentheassumptionsandthestochasticvariables. Demographic assumptions Persistency,mortalityandmorbidityassumptionsarebasedonananalysisofrecentexperience,butalsoreflectexpectedfuture experience.Whererelevant,whencalculatingthetimevalueoffinancialoptionsandguarantees,policyholderwithdrawalratesvaryin linewiththeemerginginvestmentconditionsaccordingtomanagement’sexpectations.Whenprojectingcashflowsformedical reimbursementbusinessthatisrepricedannually,explicitallowanceismadeforexpectedfuturepremiumsinflationandseparatelyfor futuremedicalclaimsinflation.The2018EEVresultsreflectthisapproach.Previously,medicalclaimsinflationwasimplicitlyallowedfor byassumingthatallincreasesinmedicalclaimcostsweredirectlyoffsetbyfuturepremiumincreaseswithnoimpactonprofits. Expense assumptions Expenselevels,includingthoseofservicecompaniesthatsupporttheGroup’slong-termbusinessoperations,arebasedoninternal expenseanalysisandareappropriatelyallocatedtoacquisitionofnewbusinessandrenewalofin-forcebusiness.Formaturebusiness,it isPrudential’spolicynottotakecreditforfuturecostreductionprogrammesuntiltheactionstoachievethesavingshavebeendelivered. Anallowanceismadeforshort-termrequiredexpenses,thatarenotrepresentativeofthelonger-termexpenseloadingsoftherelevant businesses.At31December2018,theallowanceheldforthesecostsacrosstheGroupwas£(436)millionmainlyarisinginAsia.Expense overrunsarereportedwheretheseareexpectedtobeshort-lived,includingbusinessesthataregrowingrapidlyoraresub-scale. ForAsiaoperations,theexpensescomprisecostsbornedirectlyandrechargedcostsfromtheAsiaRegionalHeadOfficethatare attributabletocoveredbusiness.Theassumedfutureexpensesfortheseoperationsalsoincludeprojectionsofthesefuturerecharges. Developmentexpensesarechargedasincurred. Corporateexpenditure,whichisincludedinotherincomeandexpenditure,comprises: — ExpenditureforGroupHeadOffice,totheextentnotallocatedtotheUKwith-profitsfunds,togetherwithrestructuringcosts incurredacrossthegroup;and — ExpenditureoftheAsiaRegionalHeadOfficethatisnotallocatedtothecoveredbusinessorassetmanagementoperationswhichis chargedasincurred.Thesecostsareprimarilyforcorporaterelatedactivitiesandareincludedwithincorporateexpenditure. (viii) Tax rates Theassumedlong-termeffectivetaxratesforoperationsreflecttheincidenceoftaxableprofitsandlossesintheprojectedcashflowsas explainedinnote13(i)(j). Thelocalstatutorycorporatetaxratesapplicableforthemostsignificantoperationsfor2018and2017areasfollows: Asiaoperations: HongKong Indonesia Malaysia Singapore USoperations UKoperations %       16.5percenton5percentofpremiumincome 25.0 24.0 17.0 2017:35.0;2018:21.0 2017and2018:19.0;from1April2020:17.0 372 Prudential plc AnnualReport2018 www.prudential.co.uk 15 Insurance new business premiumsnote(i) Asia US UKandEurope Group total Asia Cambodia HongKong Indonesia Malaysia Philippines Singapore Thailand Vietnam South-east Asia operations including Hong Kong China note (ii) Taiwan India note (iii) Total US Variableannuities EliteAccess(variableannuity) Fixedannuities Fixedindexannuities Wholesale Total UK and Europe Bonds Corporatepensions Individualpensions Incomedrawdown Otherproducts Total Single premiums Regular premiums Annual premium equivalents (APE) note13(i)(b) Present value of new business premiums (PVNBP) note13(i)(b) 2018 £m 2017 £m 2018 £m 2017 £m 2018 £m 2017 £m 2018 £m 2017 £m 2,316 15,423 13,382 2,299 16,622 13,044 31,121 31,965 – 343 205 84 43 930 217 20 – 582 288 73 62 859 139 8 1,842 103 292 79 2,316 2,011 179 46 63 2,299 10,810 1,681 340 251 2,341 11,536 2,013 454 295 2,324 15,423 16,622 3,539 69 5,681 2,555 1,538 3,509 103 5,747 2,218 1,467 13,382 13,044 3,513 – 177 3,690 20 1,663 215 243 83 369 95 144 2,832 292 182 207 3,513 – – – – – – – 117 35 – 25 177 3,575 – 187 3,762 16 1,667 268 271 71 361 70 133 2,857 276 208 234 3,575 – – – – – – – 130 32 – 25 187 3,744 1,542 1,516 6,802 20 1,697 236 251 87 462 117 146 3,016 302 211 215 3,744 1,081 168 34 25 234 1,542 354 124 603 256 179 3,805 1,662 1,491 6,958 16 1,725 297 278 77 447 84 134 3,058 294 213 240 3,805 1,154 201 45 30 232 1,662 351 140 607 222 171 20,754 15,423 14,073 20,405 16,622 13,784 50,250 50,811 89 10,200 910 1,322 296 3,611 609 708 70 10,027 1,183 1,398 287 3,463 421 659 17,745 1,313 788 908 17,508 1,299 634 964 20,754 20,405 10,810 1,681 340 251 2,341 11,536 2,013 454 295 2,324 15,423 16,622 3,540 443 5,832 2,555 1,703 3,510 533 5,897 2,218 1,626 1,516 1,491 14,073 13,784 Group total 31,121 31,965 3,690 3,762 6,802 6,958 50,250 50,811 Notes (i) Thetablesshownaboveareprovidedasanindicativevolumemeasureoftransactionsundertakeninthereportingperiodthathavethepotentialtogenerateprofitsfor shareholders.Theamountsshownarenot,andnotintendedtobe,reflectiveofpremiumincomerecordedintheIFRSincomestatement.AreconciliationofAPEandgrossearned premiumsonanIFRSbasisisprovidedinnoteIII(g)withintheunauditedfinancialinformation. (ii) NewbusinessinChinaisincludedatPrudential’s50percentinterestintheChinalifeoperation. (iii) NewbusinessinIndiaisincludedatPrudential’s26percentinterestintheIndialifeoperation. www.prudential.co.uk AnnualReport2018 Prudential plc 373 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationNotes on the EEV basis results continued 16 Impact of US tax reform On22December2017,TheTaxCutsandJobsActintheUSwasenactedintolaweffectivefrom1January2018.Thetaxreformpackage asawhole,whichincludedareductioninthecorporateincometaxratefrom35percentto21percentandanumberofspecificmeasures affectingUSlifeinsurers,resultedina£390millionbenefitinnon-operatingprofitreflectedwithinthe2017results.Thepositiveimpact onanEEVbasisrepresentedthebenefitoffutureprofitsbeingtaxedatalowerrate,partiallyoffsetbyareductioninthenetdeferredtax assetheldinthebalancesheettoreflectremeasurementatthenewlowertaxrate,togetherwithareductioninthebenefitfromthe dividendreceiveddeductionontaxableprofitsfromvariableannuitybusiness.InJune2018,theNationalAssociationofInsurance Commissioners(NAIC)formallyapprovedchangestoRBCcapitalfactorsthatreflectedtheDecember2017UStaxreformandthe2018 EEVresultsreflectthesechangesasshowninnotes6and9. 17 Corporate transactions Disposals and other corporate transactions TransactionsassociatedwithM&GPrudential note (i) Othertransactions note (ii) 2018 £m 2017 £m (376) (75) (451) – 80 80 Notes (i)     Transactions associated with M&GPrudential ThefollowingtransactionsreducedtheGroup’sEEVby£(376)million,whichprimarilyreflectsthelossofprofitsontheportionofannuityliabilitiessold. Intention to demerge the Group’s UK and Europe business and transfer of Hong Kong insurance subsidiaries InMarch2018,theGroupannounceditsintentiontodemergeitsUKandEuropebusiness(M&GPrudential)fromPrudentialplc,resultingintwoseparatelylistedcompanies.In preparationfortheUKdemergerprocess,duringDecember2018,thelegalownershipofPrudentialplc’sHongKonginsurancesubsidiarieswastransferredfromThePrudential AssuranceCompanyLimited(M&GPrudential’sUKregulatedInsuranceentity)toPrudentialCorporationAsiaLimited. Sale of shareholder annuity portfolio InMarch2018,M&GPrudentialreinsured£12.0billionofitsshareholderannuityportfolio(IFRSliabilitiesvaluedasat31December2017)toRothesayLife.Underthetermsofthe agreement,thereinsuranceisexpectedtobefollowedbyaPartVIItransferofmostofthereinsuredportfolioby30June2019.The2018EEVresultsincludetheimpactonEEV resultingfromthistransfer. (ii) Other transactions  In2018,othercorporatetransactionsresultedinanEEVlossof£(75)million(2017:£80milliongain).ThisprimarilyrelatestoadditionalcostsincurredinexitingtheUS broker-dealerbusiness(whichrealisedapost-taxgainof£80millionwhentheindependentbroker-dealernetworkwassoldtoLPLFinancialLLCin2017)andcostsrelatedtothe preparationfortheannounceddemergerdiscussedabove. 18 Post balance sheet events Renewal of strategic bancassurance alliance with United Overseas Bank Limited InJanuary2019,theGroupannouncedtherenewalofitsregionalstrategicbancassurancealliancewithUnitedOverseasBankLimited (UOB).Thenewagreementextendstheoriginalalliancewhichcommencedin2010to2034andincreasesthegeographicalscopeto includeafifthmarket,Vietnam,alongsidetheexistingmarketsacrossSingapore,Malaysia,ThailandandIndonesia. Aspartofthistransaction,PrudentialhasagreedtopayUOBaninitialfeeof£662million(translatedusingaSingaporedollar:£ foreignexchangerateof1.7360)fordistributionrightswhichisnotdependentonfuturesalesvolumes.Thisamountwillbepaidinthree instalmentsof£230millioninFebruary2019,£331millioninJanuary2020and£101millioninJanuary2021.InlinewiththeGroup’s policy,theseamountswillbecapitalisedasdistributionrightsintangibleasset. 374 Prudential plc AnnualReport2018 www.prudential.co.uk Statement of Directors’ responsibilities in respect of the European Embedded Value (EEV) basis supplementary information The directors have chosen to prepare supplementary information in accordance with the European Embedded Value Principles dated April 2016 by the European Insurance CFO Forum (‘the EEV Principles’) using the methodology and assumptions set out in the Notes on the EEV basis results. WhencompliancewiththeEEVPrinciples isstated,thoseprinciplesrequirethe directorstopreparesupplementary informationinaccordancewiththe EmbeddedValueMethodology(EVM) containedintheEEVPrinciplesandto discloseandexplainanynon-compliance withtheEEVguidanceincludedintheEEV Principles. InpreparingtheEEVsupplementary information,thedirectorshave: — Preparedthesupplementary informationinaccordancewiththeEEV Principles; — Identifiedanddescribedthebusiness coveredbytheEVM; — AppliedtheEVMconsistentlytothe coveredbusiness; — Determinedassumptionsonarealistic basis,havingregardtopast,currentand expectedfutureexperienceandtoany relevantexternaldata,andthenapplied themconsistently; — Madeestimatesthatarereasonableand consistent;and — Describedthebasisonwhichbusiness thatisnotcoveredbusinesshasbeen includedinthesupplementary information,includinganymaterial departuresfromtheaccounting frameworkapplicabletotheGroup’s financialstatements. www.prudential.co.uk AnnualReport2018 Prudential plc 375 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationIndependent auditor’s report to Prudential plc on the European Embedded Value (EEV) basis supplementary information Opinions and conclusions arising from our audit Our opinion on the EEV basis supplementary information is unmodified WehaveauditedtheEEVbasis supplementaryinformation ofPrudentialplc(“theCompany”)forthe yearended31December2018setoutin theEEVbasisresultsandNotesonthe EEVbasisresultspages.TheEEVbasis supplementaryinformationshouldbe readinconjunctionwiththeGroup financialstatements. Inouropinion,theEEVbasis supplementaryinformationofthe Companyfortheyearended31December 2018hasbeenproperlyprepared,inall materialrespects,inaccordancewiththe EuropeanEmbeddedValuePrinciples datedApril2016bytheEuropean InsuranceCFOForum(“theEEV Principles”)usingthemethodologyand assumptionssetoutintheNotesonthe EEVbasisresults. The impact of uncertainties due to the UK exiting the European Union on our audit Uncertaintiesrelatedtotheeffectsof Brexitarerelevanttounderstandingour auditofthefinancialstatements.Allaudits assessandchallengethereasonableness ofestimatesmadebythedirectorsand relateddisclosuresandtheappropriateness ofthegoingconcernbasisofpreparation ofthefinancialstatements.Allofthese dependonassessmentsofthefuture economicenvironmentandthegroup’s futureprospectsandperformance.Brexit isoneofthemostsignificanteconomic eventsfortheUK,andatthedateof thisreportitseffectsaresubjectto unprecedentedlevelsofuncertaintyof outcomes,withthefullrangeofpossible effectsunknown.Weapplieda standardisedfirm-wideapproachin responsetothatuncertaintywhen assessingthegroup’sfutureprospects andperformance.However,noaudit shouldbeexpectedtopredictthe unknowablefactorsorallpossiblefuture implicationsforacompanyandthisis particularlythecaseinrelationtoBrexit. Respective responsibilities of directors and auditor AsexplainedmorefullyintheDirectors’ ResponsibilitiesStatementsetouton page375,thedirectorshaveaccepted responsibilityforthepreparationof thesupplementaryinformationonthe EEVbasisinaccordancewiththe EEVPrinciples. Ourresponsibilityistoaudit,andexpress anopinionon,thesupplementary informationinaccordancewiththeterms ofourengagementandinaccordancewith InternationalStandardsonAuditing(UK). Thosestandardsrequireustocomply withtheFinancialReportingCouncil’s EthicalStandard. Scope of an audit of financial statements performed in accordance with ISAs (UK) Adescriptionofthescopeofanaudit offinancialstatementsisprovidedon ourwebsiteatwww.kpmg.com/uk/ auditscopeukco2014a.Thisreportis madesubjecttoimportantexplanations regardingourresponsibilities,aspublished onthatwebsite,whichareincorporated intothisreportasifsetoutinfulland shouldbereadtoprovideanunderstanding ofthepurposeofthisreport,thework wehaveundertakenandthebasisof ouropinions. The purpose of this report and restrictions on its use by persons other than the Company ThisreportismadesolelytotheCompany inaccordancewiththetermsofour engagement.Ourauditworkhasbeen undertakensothatwemightstatetothe Companythosematterswehavebeen engagedtostateinthisreportandforno otherpurpose.Tothefullestextent permittedbylaw,wedonotacceptor assumeresponsibilitytoanyoneotherthan theCompanyforourauditwork,forthis report,orfortheopinionswehaveformed. Philip Smart (SeniorStatutoryAuditor) forandonbehalfofKPMGLLP, StatutoryAuditor CharteredAccountants London 12March2019 376 Prudential plc AnnualReport2018 www.prudential.co.uk 0 1  G  r o u p o v e r v e w i 0 2  i S t r a t e g c  r e p o r t 0 3  G o v e r n a n c e 0 4  D i r e c t o r s ’  r e m u n e r a t i o n  r e p o r t 0 5  i F n a n c i a l  s t a t e m e n t s 0 6    E u r o p e a n E m b e d d e d V a u e  ( E E V )  b a s i s  r e s u l t s l 07 Additional information Index to the additional unaudited financial information Risk factors Glossary Shareholder information How to contact us Page 378 407 416 420 423 www.prudential.co.uk AnnualReport2018 Prudential plc 377 0 7  A d d i t i o n a l  i n f o r m a t i o n Index to the additional unaudited financial information* I IFRS profit and loss before tax (a) Analysisoflong-terminsurancebusinessadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsbydriver (b) Asiaoperations–analysisofoperatingprofitbybusinessunit (c) Analysisofassetmanagementoperatingprofitbasedonlonger-terminvestmentreturns (d) ContributiontoUKlong-termfinancialmetricsfromspecificmanagementactionsundertakentopositionthebalancesheet moreefficientlyundertheSolvencyIIregime II Other information (a) Holdingcompanycashflow (b) Fundsundermanagement (c) SolvencyIIcapitalposition (d) Reconciliationofexpectedtransferofvalueofin-forcebusiness(VIF)andrequiredcapitaltofreesurplus (e) Foreigncurrencysourceofkeymetrics (f) Optionschemes (g) SelectedhistoricalfinancialinformationofPrudential III Calculation of alternative performance measures (a) ReconciliationofadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnstoprofitbeforetax (b) CalculationofreturnonIFRSshareholders’funds (c) CalculationofIFRSgearingratio (d) CalculationofIFRSshareholders’fundspershare (e) Calculationofassetmanagementcost/incomeratio (f) ReconciliationofAsiarenewalinsurancepremiumtogrossearnedpremiums (g) ReconciliationofAPEnewbusinesssalestoearnedpremiums (h) ReconciliationbetweenIFRSandEEVshareholders’funds (i) ReconciliationofEEVoperatingprofitbasedonlonger-terminvestmentreturns (j) Calculationofreturnonembeddedvalue (k) CalculationofEEVshareholders’fundspershare Page 379 385 385 387 388 389 390 394 399 399 401 403 404 404 404 404 405 405 406 406 406 406 *Inthisadditionalunauditedfinancialinformation‘operatingprofit’referstoadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturns. 378 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information I IFRS profit and loss information I(a) Analysis of long-term insurance business adjusted IFRS operating profit based on longer-term investment returns by driver ThisscheduleclassifiestheGroup’sadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsfromlong-terminsurance operationsintotheunderlyingdrivers,usingthefollowingcategories: — Spread incomerepresentsthedifferencebetweennetinvestmentincomeandamountscreditedtocertainpolicyholderaccounts. Itexcludestheoperatinginvestmentreturnonshareholdernetassets,whichhasbeenseparatelydisclosedasexpectedreturnon shareholderassets. — Fee incomerepresentsprofitsdrivenbynetinvestmentperformance,beingassetmanagementfeesthatvarywiththesizeofthe underlyingpolicyholderfundsnetofinvestmentmanagementexpenses. — With-profitsrepresentthepre-taxshareholders’transferfromthewith-profitsfundsfortheyear. — Insurance marginprimarilyrepresentsprofitsderivedfromtheinsurancerisksofmortalityandmorbidity. — Margin on revenuesprimarilyrepresentsamountsdeductedfrompremiumstocoveracquisitioncostsandadministrationexpenses. — Acquisition costs and administration expensesrepresentexpensesincurredintheyearattributabletoshareholders.These excludeitemssuchasrestructuringcostswhicharenotincludedinthesegmentprofitforinsurance,aswellasitemsthataremore appropriatelyincludedinothersourcesofearningslines(eginvestmentexpensesarenettedagainstinvestmentincomeaspartof spreadincomeorfeeincomeasappropriate). — DAC adjustments compriseDACamortisationfortheyear,excludingamountsrelatedtoshort-termfluctuationsininvestment returns,netofcostsdeferredinrespectofnewbusiness. Analysis of adjusted IFRS operating profit based on longer-term investment returns by source and margin analysis of Group long-term insurance business ThefollowinganalysisexpressescertainoftheGroup’ssourcesofadjustedIFRSoperatingprofitbasedonlong-terminvestmentreturns asamarginofpolicyholderliabilitiesorotherrelevantdrivers.DetailsonthecalculationoftheGroup’saveragepolicyholderliability balancesaregiveninnote(iv)attheendofthissection. Average liability note(iv) 85,850 175,443 147,318 Margin bps note(ii) 105 155 27 6,802 265,597 (34)% (91) Spreadincome Feeincome With-profits Insurancemargin Marginonrevenues Expenses:  Acquisitioncosts note (i)  Administrationexpenses  DACadjustments note (v) Expectedreturnonshareholderassets Shareofrelatedtaxchargesfromjointventures andassociate note (vi) Longevityreinsuranceandothermanagement actionstoimprovesolvency Changesinlongevityassumptionbasis Provisionforguaranteedminimumpension equalisation Insurancerecoveriesofcostsassociatedwith reviewofpastannuitysales Long-termbusinessadjustedIFRSoperating profitbasedonlonger-terminvestment returns Asia US 2018 £m UK and Europe 583 2,445 – 949 – (759) (1,204) (114) 11 1,911 232 210 71 1,481 2,105 (1,503) (1,029) 326 129 2,022 (40) 84 56 320 50 149 (57) (180) 4 102 528 – 58 441 (55) 166 Total 899 2,711 391 2,480 2,254 (2,319) (2,413) 216 242 4,461 (40) 58 441 (55) 166 1,982 1,911 1,138 5,031 www.prudential.co.uk AnnualReport2018 Prudential plc 379 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationI IFRS profit and loss information continued I(a) Analysis of long-term insurance business adjusted IFRS operating profit based on longer-term investment returns by driver continued Spreadincome Feeincome With-profits Insurancemargin Marginonrevenues Expenses:  Acquisitioncosts note (i)  Administrationexpenses  DACadjustments note (v) Expectedreturnonshareholderassets Shareofrelatedtaxchargesfromjointventures andassociate note (vi) Longevityreinsuranceandothermanagement actionstoimprovesolvency Changesinlongevityassumptionbasis Provisionforreviewofpastannuitysales Long-termbusinessadjustedIFRSoperating profitbasedonlonger-terminvestment returns Spreadincome Feeincome With-profits Insurancemargin Marginonrevenues Expenses:  Acquisitioncosts note (i)  Administrationexpenses  DACadjustments note (v) Expectedreturnonshareholderassets Shareofrelatedtaxchargesfromjointventures andassociate note (vi) Longevityreinsuranceandothermanagement actionstoimprovesolvency Changesinlongevityassumptionbasis Provisionforreviewofpastannuitysales Long-termbusinessadjustedIFRSoperating profitbasedonlonger-terminvestment returns Average liability note(iv) 88,908 166,839 136,474 Margin bps note(ii) 126 156 25 6,958 261,114 (35)% (88) Average liability note(iv) 87,553 162,267 136,496 Margin bps note(ii) 124 155 25 6,767 255,313 (35)% (87) Asia US 2017 AER £m UK and Europe 234 205 59 1,341 2,098 (1,499) (967) 241 126 1,838 (39) – – – 751 2,343 – 906 – (876) (1,174) 260 4 2,214 – – – – 137 61 288 55 189 (68) (164) 4 104 606 – 276 204 (225) Total 1,122 2,609 347 2,302 2,287 (2,443) (2,305) 505 234 4,658 (39) 276 204 (225) 1,799 2,214 861 4,874 Asia US 2017 CER £m note(iii) UK and Europe 228 195 57 1,293 2,021 (1,450) (933) 235 120 1,766 (39) – – – 725 2,262 – 875 – (846) (1,134) 251 4 2,137 – – – – 137 61 288 55 189 (68) (164) 4 104 606 – 276 204 (225) Total 1,090 2,518 345 2,223 2,210 (2,364) (2,231) 490 228 4,509 (39) 276 204 (225) 1,727 2,137 861 4,725 380 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continued (iv) TheratioofacquisitioncostsiscalculatedasapercentageofAPEsalesincludingwith-profitssales.Acquisitioncostsincludeonlythoserelatingtoshareholder-backedbusiness. Notes to sources of earnings tables throughout I(a) (i) (ii) Marginrepresentstheoperatingreturnearnedintheyearasaproportionoftherelevantclassofaveragepolicyholderliabilitiesexcludingunallocatedsurplus. (iii) The2017comparativeinformationhasbeenpresentedatAERandCERtoeliminatetheimpactofforeignexchangetranslation.CERresultsarecalculatedbytranslatingprior yearresultsusingthecurrentyearforeignexchangerates.AllCERprofitfigureshavebeentranslatedatcurrentyearaveragerates.ForAsiaCERaveragepolicyholderliability calculations,theamountshavebeentranslatedusingcurrentyearopeningandclosingexchangerates.FortheUSCERaverageliabilitycalculations,theamountshavebeen translatedatthecurrentyearmonth-endclosingexchangerates.SeenoteA1intheIFRSfinancialstatementsforforeignexchangeratesused. ForUKandEuropeandAsia,openingandclosingpolicyholderliabilitieshavebeenusedtoderiveanaveragebalancefortheyear,asaproxyforaveragebalancesthroughout theyear.ThecalculationofaverageliabilitiesforJacksonisgenerallyderivedfrommonth-endbalancesthroughouttheyear,asopposedtoopeningandclosingbalancesonly. TheaverageliabilitiesforfeeincomeinJacksonhavebeencalculatedusingdailybalancesinsteadofmonth-endbalancesinordertoprovideamoremeaningfulanalysisofthe feeincome,whichischargedonthedailyaccountbalance.Averageliabilitiesforspreadincomearebasedonthegeneralaccountliabilitiestowhichspreadincomeattaches. AverageliabilitiesusedtocalculatetheadministrationexpensemarginexcludetheREALICliabilitiesreinsuredtothirdpartiespriortotheacquisitionbyJackson. TheDACadjustmentscontainacreditof£55millioninrespectofjointventuresandassociatein2018(2017:AERcreditof£43million). (v) (vi) UnderIFRS,theGroup’sshareofresultsfromitsinvestmentsinjointventuresandassociateaccountedforusingtheequitymethodisincludedintheGroup’sprofitbeforetaxona netofrelatedtaxbasis.In2018,theGroupalteredthepresentationofitsanalysisofAsiaadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsbydrivertoshow thesetaxchargesseparatelyinorderforthecontributionfromthejointventuresandassociatetobeincludedinthemarginanalysisonaconsistentbasisastherestoftheAsia operations.2017comparativeshavebeenre-presentedaccordingly. Margin analysis of long-term insurance business – Asia Spreadincome Feeincome With-profits Insurancemargin Marginonrevenues Expenses:  Acquisitioncosts note (i)  Administrationexpenses  DACadjustments note (v) Expectedreturnonshareholderassets Shareofrelatedtaxchargesfromjoint venturesandassociate note (vi) AdjustedIFRSoperatingprofitbased onlonger-terminvestmentreturns 2017 AER Average liability note(iv) £m 16,359 18,767 30,115 Margin note(ii) bps 143 109 20 3,805 35,126 (39)% (275) 2018 Average liability note(iv) £m 18,895 20,105 36,309 Margin note(ii) bps 123 104 20 Profit £m 232 210 71 1,481 2,105 (1,503) 3,744 (1,029) 39,000 (40)% (264) 326 129 2,022 (40) 1,982 Profit £m 234 205 59 1,341 2,098 (1,499) (967) 241 126 1,838 (39) 1,799 2017 CER note(iii) Average liability note(iv) £m 16,351 18,638 30,137 Margin note(ii) bps 139 105 19 3,671 34,989 (39)% (267) Profit £m 228 195 57 1,293 2,021 (1,450) (933) 235 120 1,766 (39) 1,727 Analysis of Asia adjusted IFRS operating profit based on longer-term investment returns by driver: — SpreadincomehasincreasedonaCERbasisby2percent(AER:decreasedby1percent)to£232millionin2018,withadecrease inthemarginonaCERbasisfrom139basispointsin2017to123basispointsin2018(AER:decreasedfrom143basispointsin2017 to123basispointsin2018)predominantlyreflectingthechangeininvestmentmix,countryandproductmix. — Feeincomehasincreasedby8percentonaCERbasis(AER:2percent)to£210millionin2018,broadlyinlinewiththeincreasein movementinaverageunit-linkedpolicyholderliabilities. — Insurancemarginhasincreasedby15percentonaCERbasis(AER:10percent)to£1,481millionin2018,primarilyreflectingthe continuedgrowthofthein-forcebook,whichcontainsarelativelyhighproportionofrisk-basedproducts. — Marginonrevenueshasincreasedby4percentonaCERbasis(AER:lessthan1percent)to£2,105millionin2018,primarily reflectinghigherpremiumstogetherwiththeeffectofchangesinproductmixandhigherpremiumallocationtopolicyholders. — Acquisitioncostshaveincreasedby4percentonaCERbasis(AER:lessthan1percent)to£1,503millionin2018,comparedtoa 2percentincreaseinAPEsalesonaCERbasis,resultinginanincreaseintheacquisitioncostsratio.Theanalysisinthetableabove usesshareholderacquisitioncostsasaproportionoftotalAPEsales.Ifwith-profitssaleswereexcludedfromthedenominator,the acquisitioncostratiowouldbecome69percent(2017:67percentonaCERbasis),theincreasebeingtheresultofproductand countrymix. — Administrationexpensesincludingrenewalcommissionshaveincreasedby10percentonaCERbasis(AER:6percent)to £1,029millionin2018asthebusinesscontinuestoexpand.OnaCERbasis,theadministrationexpenseratiohasdecreasedfrom 267basispointsin2017to264basispointsin2018asaresultofchangesincountryandproductmix. www.prudential.co.uk AnnualReport2018 Prudential plc 381 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationI IFRS profit and loss information continued I(a) Analysis of long-term insurance business adjusted IFRS operating profit based on longer-term investment returns by driver continued Margin analysis of long-term insurance business – US Spreadincome Feeincome Insurancemargin Expenses: Acquisitioncosts note (i) Administrationexpenses DACadjustments Expectedreturnonshareholderassets AdjustedIFRSoperatingprofitbased onlonger-terminvestmentreturns 2018 Average liability note(iv) £m Profit £m 583 37,608 2,445 133,407 949 Margin note(ii) bps 155 183 2017 AER Average liability note(iv) £m Profit £m 751 38,918 2,343 125,440 906 Margin note(ii) bps 193 187 2017 CER note(iii) Profit £m Average liability note(iv) £m 725 37,571 2,262 120,997 875 Margin note(ii) bps 193 187 (759) 1,542 (1,204) 175,319 (49)% (69) (876) 1,662 (1,174) 169,725 (53)% (69) (846) 1,605 (1,134) 164,061 (53)% (69) (114) 11 1,911 260 4 2,214 251 4 2,137   Analysis of US adjusted IFRS operating profit based on long-term investment returns by driver: — Spreadincomehasdecreasedby20percentonaCERbasis(AER:22percent)to£583millionin2018.Thereportedspreadmargin decreasedto155basispointsfrom193basispointsin2017,primarilyduetotheimpactofincreasingLIBORoninterestrateswaps, lowerinvestmentyieldsandmaturingofswapspreviouslyenteredintotomorecloselymatchtheassetandliabilityduration. Excludingtheeffectofthesehistoricswaptransactions,thespreadmarginwouldhavebeen130basispoints(2017:144basispoints atCERandAER). — Feeincomehasincreasedby8percentonaCERbasis(AER:4percent)to£2,445millionduring2018,primarilyduetohigher averageseparateaccountbalancesresultingfrompositivenetflowsfromvariableannuitybusinessandmarketappreciationduring mostof2018beforeadeclineinthefourthquarterof2018.Feeincomemarginhasdecreasedto183basispoints(2017:187basis pointsatCERandAER)primarilyreflectingachangeinbusinessmix. — Insurancemarginrepresentsprofitsfrominsurancerisks,includingvariableannuityguaranteesandothersundryitems.Insurance marginincreasedby8percentonaCERbasis(AER:5percent)to£949millionin2018mainlyduetohigherincomefromvariable annuityguaranteesandfavourablemortalityexperience. — Acquisitioncosts,whicharecommissionsandexpensesincurredtoacquirenewbusiness,includingthosethatarenotdeferrable, havedecreasedby10percentonaCERbasis(AER:13percent).Thisreflectsa4percentdecreaseinAPEsalesandlowerlevelof front-endedcommissions. — Administrationexpensesincreasedby6percentonaCERbasis(AER:3percent)to£(1,204)millionduring2018,primarilyasaresult ofhigherasset-basedcommissions.Excludingtheseasset-basedcommissions,theresultingadministrationexpenseratiowouldbe lowerat34basispoints(2017:35basispointsatCERandAER). — DACadjustmentsin2018wasnegative£(114)million(comparedto£251millioncreditin2017onaCERbasis)duetoanincreasein theDACamortisationcharge.ThehigherDACamortisationchargeariseslargelyfromanaccelerationofamortisationof£(194)million (2017:creditfordecelerationof£83milliononaCERbasis)primarilyrelatingtothemarketreturnsin2018andthereversalofthe benefitreceivedin2015underthemeanreversionformula. 382 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continuedAnalysis of adjusted IFRS operating profit based on longer-term investment returns before and after acquisition costs and DAC adjustments 2018 £m Acquisition costs 2017 AER £m Acquisition costs 2017 CER £m note(iii) Acquisition costs Before acquisi- tion costs and DAC adjust- ments After acquisi- tion costs and DAC adjust- ments Before acquisi- tion costs and DAC adjust- ments Incurred Deferred After acquisi- tion costs and DAC adjust- ments Before acquisi- tion costs and DAC adjust- ments After acquisi- tion costs and DAC adjust- ments Incurred Deferred Incurred Deferred Totaladjusted IFRSoperating profitbased onlonger-term investment returnsbefore acquisition costsandDAC adjustments Lessnewbusiness strain Amortisationof previously deferred acquisition costs: Normal (Accelerated) decelerated 2,784 2,784 2,830 2,830 2,732 2,732 (759) 569 (190) (876) 663 (213) (846) 640 (206) Total 2,784 (759) (114) 1,911 2,830 (876) (489) (489) (194) (194) (489) (489) 86 260 86 2,214 2,732 (846) (472) (472) 83 251 83 2,137 Analysis of adjusted IFRS operating profit based on longer-term investment returns for US operations by product Spreadbusiness Feebusiness Lifeandotherbusiness Total insurance operations note USassetmanagementandbroker-dealer Total US operations 2018 £m 2017 £m 2018 vs 2017 % 297 1,532 82 1,911 8 1,919 AER 317 1,788 109 2,214 10 2,224 CER 306 1,726 105 2,137 9 2,146 AER (6)% (14)% (25)% (14)% (20)% (14)% CER (3)% (11)% (22)% (11)% (11)% (11)% Note TheanalysisofadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsforUSoperationsbyproductrepresentsthenetprofitgeneratedbyeachlineofbusinessafter allocationofcosts.Broadly: –Spreadbusinessisthenetprofitforfixedannuity,fixedindexedannuityandguaranteedinvestmentcontractsandlargelycomprisesspreadincomelesscosts. –Feebusinessrepresentsprofitsfromvariableannuityproducts.Aswellasfeeincome,revenueforthisproductlineincludesspreadincomefrominvestmentsdirectedtothegeneral accountandothervariableannuityfeesincludedininsurancemargin. –LifeandotherbusinessincludestheprofitsfromtheREALICbusinessandotherclosedlifebooks.Revenueallocatedtothisproductlineincludesspreadincomeandpremiumsand policychargesforlifeprotection,whichareincludedininsurancemarginafterclaimcosts.Insurancemarginformsthevastmajorityofrevenue.  www.prudential.co.uk AnnualReport2018 Prudential plc 383 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationI IFRS profit and loss information continued I(a) Analysis of long-term insurance business adjusted IFRS operating profit based on longer-term investment returns by driver continued Margin analysis of long-term insurance business – UK and Europe Spreadincome Feeincome With-profits Insurancemargin Marginonrevenues Expenses:  Acquisitioncosts note (i)  Administrationexpenses  DACadjustments Expectedreturnonshareholderassets Longevityreinsuranceandothermanagement actionstoimprovesolvency Changesinlongevityassumptionbasis Provisionforguaranteedminimumpension equalisation Insurancerecoveriesofcostsassociatedwith reviewofpastannuitysales Provisionforreviewofpastannuitysales AdjustedIFRSoperatingprofitbasedon longer-terminvestmentreturns Profit £m 84 56 320 50 149 (57) (180) 4 102 528 58 441 (55) 166 – 1,138 2018 Average liability note(iv) £m 29,347 21,931 111,009 Margin note(ii) bps 29 26 29 1,516 51,278 (4)% (35) 2017 Average liability note(iv) £m 33,631 22,632 106,359 Margin note(ii) bps 41 27 27 1,491 56,263 (5)% (29) Profit £m 137 61 288 55 189 (68) (164) 4 104 606 276 204 – – (225) 861   Analysis of UK and Europe adjusted IFRS operating profit based on longer-term investment returns by driver: — Spreadincomehasreducedfrom£137millionin2017to£84millionin2018reflectingtherun-offofthein-forceannuityportfolio andtheeffectofthereinsuranceof£12.0billionofannuityportfoliostoRothesayLifeenteredintoinMarch2018. — Feeincomeprincipallyrepresentsassetmanagementfeesfromunit-linkedbusiness(includingdirectinvestmentonlybusinessto Grouppensionschemeswhereliabilityflowsaredrivenbyasmallnumberoflargesinglemandatetransactionsandmostlyarises withintheUKandEuropeassetmanagementbusiness).Feeincomeisaftercostsrelatingtomanagingtheunderlyingfundswhich includerecentrationalisationactivitytoremovesub-scalefunds.Ifthesecostsandthedirectinvestmentonlyschemesareexcluded, thefeemarginontheremainingbalanceswouldbe36basispoints(2017:40basispoints). — Marginonrevenuesrepresentspremiumchargesforexpensesofshareholder-backedbusinessandothersundrynetincome. — The£441millionfavourableeffectoflongevityassumptionrelatestochangestoannuitantmortalityassumptionstoreflectcurrent mortalityexperienceandtheadoptionoftheContinuousMortalityInvestigation(CMI)2016model.Furtherinformationonchanges tomortalityassumptionsisgiveninnoteC4.1(d)intheIFRSfinancialstatements. — Anallowanceprovisionof£(55)millionhasbeenmadein2018toreflectthecostsofequalisingguaranteedminimumpensionbenefits onpensionproductssoldbytheinsurancebusinessfollowingtherulingbytheHighCourtinOctober2018.Furtherinformationis providedinnoteC9intheIFRSfinancialstatements. — The2018insurancerecoveriesofcostsassociatedwithundertakingareviewofpastannuitysalesof£166million(2017:£nil)is explainedinnoteC11,‘Provisions’,intheIFRSfinancialstatements. 384 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continued I(b) Asia operations – analysis of IFRS operating profit by business unit Operatingprofitbasedonlonger-terminvestmentreturnsforAsiaoperationsisanalysedasfollows: HongKong Indonesia Malaysia Philippines Singapore Thailand Vietnam South-east Asia operations including Hong Kong China Taiwan Other Non-recurrentitems note Total insurance operations Shareofrelatedtaxchargesfromjointventuresandassociate* Developmentexpenses Total long-term business operating profit Assetmanagement(EastspringInvestments) Total Asia operations 2018 £m AER 2017 £m CER 2017 £m 2017 AER vs 2018 2017 CER vs 2018 443 416 194 43 329 113 149 1,687 143 51 51 94 2,026 (40) (4) 1,982 182 2,164 346 457 173 41 272 107 135 1,531 121 43 71 75 1,841 (39) (3) 1,799 176 1,975 332 415 178 38 269 108 129 1,469 119 41 67 73 1,769 (39) (3) 1,727 171 1,898 28% (9)% 12% 5% 21% 6% 10% 10% 18% 19% (28)% 25% 10% (3)% (33)% 10% 3% 10% 33% 0% 9% 13% 22% 5% 16% 15% 20% 24% (24)% 29% 15% (3)% (33)% 15% 6% 14% *UnderIFRS,theGroup’sshareofresultsfromitsinvestmentsinjointventuresandassociateaccountedforusingtheequitymethodisincludedintheGroup’sprofitbeforetaxonanet ofrelatedtaxbasis.In2018,theGroupalteredthepresentationofitsanalysisofAsiaoperatingprofittoshowthesetaxchargesseparatelyinorderforthecontributionfromthejoint venturesandassociatetobeincludedintheoperatingprofitanalysisonaconsistentbasisastherestoftheAsia’soperations.2017comparativeshavebeenre-presentedaccordingly. Note In2018,theIFRSoperatingprofitbasedonlonger-terminvestmentreturnsforAsiainsuranceoperationsincludedanetcreditof£94million(2017:£75million)representingasmall numberofitemsthatarenotexpectedtoreoccur,includingtheimpactofarefinementtotherun-offoftheallowanceforprudencewithintechnicalprovisions,withinSingapore. I(c) Analysis of asset management operating profit based on longer-term investment returns Operatingincomebeforeperformance-relatedfees Performance-relatedfees Operatingincome(netofcommission) note (i) Operatingexpense note (i) Shareofassociate’sresults Group’sshareoftaxonjointventures’operatingprofit Operatingprofitbasedonlonger-terminvestmentreturns Averagefundsundermanagement Marginbasedonoperatingincome* Cost/incomeratio†        2018 £m M&GPrudential asset management note(ii) Eastspring Investments note(ii) 1,100 15 1,115 (654) 16 – 477 424 17 441 (232) – (27) 182 £276.6bn 40bps 59% £146.3bn 29bps 55% www.prudential.co.uk AnnualReport2018 Prudential plc 385 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationI IFRS profit and loss information continued I(c) Analysis of asset management operating profit based on longer-term investment returns continued Operatingincomebeforeperformance-relatedfees Performance-relatedfees Operatingincome(netofcommission) note (i) Operatingexpense note (i) Shareofassociate’sresults Group'sshareoftaxonjointventures'operatingprofit Operatingprofitbasedonlonger-terminvestmentreturns Averagefundsundermanagement Marginbasedonoperatingincome* Cost/incomeratio†    2017 £m M&GPrudential asset management note(ii) Eastspring Investments note(ii) 1,034 53 1,087 (602) 15 – 500 421 17 438 (238) – (24) 176 £275.9bn 37bps 58% £128.4bn 33bps 56% *Marginrepresentsoperatingincomebeforeperformance-relatedfeesasaproportionoftherelatedfundsundermanagement(FUM).Monthlyclosinginternalandexternalfunds managedbytherespectiveentityhavebeenusedtoderivetheaverage.AnyfundsheldbytheGroup’sinsuranceoperationsthataremanagedbythirdpartiesoutsidethePrudential Groupareexcludedfromtheseamounts.M&GPrudentialoperatingexpenseincludes£27millionofBrexitpreparationcosts. †Cost/incomeratiorepresentscostasapercentageofoperatingincomebeforeperformance-relatedfees. Notes (i) OperatingincomeandexpenseincludetheGroup’spre-taxshareofcontributionfromjointventuresbutexcludesanycontributionfromassociate.Intheconsolidatedincome statementoftheIFRSfinancialstatements,thenetpost-taxincomeofthejointventuresandassociateisshownasasinglelineitem. (ii) OperatingincomebeforeperformancerelatedfeesandmarginonrelatedfundsundermanagementforM&GPrudentialassetmanagementandEastspringInvestmentscanbe furtheranalysedasfollows: 2018 2017  2018 2017 *Institutionalincludesinternalfunds. M&GPrudential asset management Operating income before performance related fees Margin bps Institutional* £m Margin bps 85 85 438 430 22 21 Eastspring Investments Operating income before performance related fees Margin bps Institutional* £m Margin bps 50 57 172 172 18 20 Total £m 1,100 1,034 Total £m 424 421 Retail £m 662 604 Retail £m 252 249 Margin bps 40 37 Margin bps 29 33 386 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continuedI(d) Contribution to UK long-term financial metrics from specific management actions undertaken to position the balance sheet more efficiently under the Solvency II regime In2018,furthermanagementactionsweretakentoimprovethesolvencyoftheUKandEuropeinsuranceoperationsandtomitigate marketrisks.Theseactionsincludedrepositioningthefixedincomeassetportfoliotoimprovethetrade-offbetweenyieldandcreditrisk. Nonewlongevityreinsurancetransactionswereundertakenin2018(2017:longevityreinsurancetransactionsenteredintocovering £0.5billionofIFRSannuityliabilities). TheeffectoftheseactionsontheUK’slong-termIFRSoperatingprofit,underlyingfreesurplusgenerationandEEVoperatingprofit, beforerestructuringcosts,isshowninthetablesbelow. IFRS operating profit of UK long-term business before tax  Longevityreinsurancetransactions Shareholder-backedannuitynewbusiness In-forcebusiness:   Othermanagementactionstoimprovesolvency  Changesinlongevityassumptionbasis    Provisionforthereviewofpastannuitysales Insurancerecoveriesinrespectofabovecosts Provisionforguaranteedminimumpensionequalisation With-profitsandotherin-force TotalIFRSoperatingprofitbeforerestructuringcosts  Underlying free surplus generation of UK long-term business     Expectedin-forceandreturnonnetworth Longevityreinsurancetransactions Othermanagementactionstoimprovesolvency Changesinlongevityassumptionbasis Provisionforthereviewofpastannuitysales Insurancerecoveriesinrespectofabovecosts Provisionforguaranteedminimumpensionequalisation Otherin-force Underlyingfreesurplusgeneratedfromin-forcebusiness Newbusinessstrain Totalfreesurplusgenerationbeforerestructuringcosts  EEV post-tax operating profit of UK long-term business Unwindofdiscountandotherexpectedreturn Longevityreinsurancetransactions Othermanagementactionstoimprovesolvency Changesinlongevityassumptionbasis Provisionforthereviewofpastannuitysales Insurancerecoveriesinrespectofabovecosts Provisionforguaranteedminimumpensionequalisation Otherin-force Operatingprofitfromin-forcebusiness Newbusinessprofit TotalEEVoperatingprofitbeforerestructuringcosts  2018 £m 2017 £m 9 – 58 441 – 166 (55) 610 519 1,138 9 31 245 204 (225) – – 255 597 861 2018 £m 2017 £m 686 – 54 364 – 138 (95) 461 130 1,277 (102) 1,175 706 15 385 179 (187) – – 392 (28) 1,070 (175) 895 2018 £m 2017 £m 474 – 141 330 – 138 (48) 561 (13) 1,022 352 1,374 465 (6) 127 195 (187) – – 129 79 673 342 1,015 www.prudential.co.uk AnnualReport2018 Prudential plc 387 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information II(a) Holding company cash flow* Net cash remitted by business units: Asia US UK and Europe:  With-profitsremittance   Assetmanagementremittance Shareholder-backedinsurancebusinessremittance  OtherUKpaidtotheGroup(includingPrudentialCapital) Total UK net remittances to the Group Net remittances to the Group from business units note (i) Netinterestpaid Taxreceived Corporateactivities Total central outflows Operating holding company cash flow before dividend Dividendpaid Operating holding company cash flow after dividend Non-operatingnetcashflow note (ii) Totalholdingcompanycashflow  Cashandshort-terminvestmentsatbeginningofyear  Foreignexchangemovements Cash and short-term investments at end of year note (iii) 2018 £m 2017 £m 699 342 233 97 324 654 37 691 1,732 (366) 142 (206) (430) 1,302 (1,244) 58 913 971 2,264 1 3,236 645 475 215 105 323 643 25 668 1,788 (415) 152 (207) (470) 1,318 (1,159) 159 (511) (352) 2,626 (10) 2,264 *TheholdingcompanycashflowdiffersfromtheIFRScashflowstatement,whichincludesallcashflowsintheperiodincludingthoserelatingtobothpolicyholderandshareholderfunds. TheholdingcompanycashflowisthereforeamoremeaningfulindicationoftheGroup’scentralliquidity. Netcashremittancescomprisedividendsandothertransfersfrombusinessunitsthatarereflectiveofemergingearningsandcapitalgeneration. Notes (i) (ii) Non-operatingnetcashflowprincipallyrelatestotheissueofsubordinateddebtlessrepaymentofdebt,andpaymentsfordistributionrightsandacquisitionofsubsidiaries. (iii) Includingcentralfinancesubsidiaries.  388 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continuedII(b) Funds under management (a) Summary Forourassetmanagementbusinesses,fundsmanagedonbehalfofthirdpartiesarenotrecordedonthebalancesheet.Theyare, however,adriverofprofitability.Wethereforeanalysethemovementinthefundsundermanagementeachperiod,focusingonthose whichareexternaltotheGroupandthoseprimarilyheldbytheinsurancebusinesses.Thetablebelowanalyses,bysegment,thefunds oftheGroupheldinthestatementoffinancialpositionandtheexternalfundsthataremanagedbyPrudential’sassetmanagement operations. Asiaoperations: Internalfunds EastspringInvestments’externalfunds USoperations:internalfunds UKandEuropeoperations: Internalfunds,includingPruFund-backedproducts Externalfunds Otheroperations Grouptotalfundsundermanagement note Note Totalfundsundermanagementcomprise: Totalinvestmentspertheconsolidatedstatementoffinancialposition ExternalfundsofM&GPrudentialandEastspringInvestments(asanalysedinnote(b)below) Internallymanagedfundsheldinjointventuresandotheradjustments Grouptotalfundsundermanagement (b) Investment products – external funds under management 31 Dec 2018 £bn 31 Dec 2017 £bn 89.5 61.1 150.6 81.4 55.9 137.3 183.1 178.3 174.3 146.9 321.2 2.4 657.3 186.8 163.9 350.7 3.0 669.3 31 Dec 2018 £bn 31 Dec 2017 £bn 449.6 208.0 (0.3) 657.3 451.4 219.8 (1.9) 669.3 2018 £m 2017 £m At 1 Jan 2018 Market gross inflows Redemptions Market and other movements At 31 Dec 2018 At 1 Jan 2017 Market gross inflows Redemptions Market and other movements At 31 Dec 2017 M&GPrudential Wholesale/Direct 79,697 24,584 (29,452) (5,364) 69,465 64,209 30,949 (19,906) 4,445 79,697 M&GPrudential Institutional Total 84,158 12,954 (18,001) (1,630) 77,481 72,554 15,220 (8,926) 5,310 84,158 M&GPrudential note (i) 163,855 37,538 (47,453) (6,994) 146,946 136,763 46,169 (28,832) 9,755 163,855 Eastspring Investments note (ii) 55,885 212,070 (212,156) 5,258 61,057 45,756 215,907 (211,271) 5,493 55,885 Total note (iii) 219,740 249,608 (259,609) (1,736) 208,003 182,519 262,076 (240,103) 15,248 219,740 Notes (i) TheresultsexcludecontributionfromPruFundproducts:netinflowsof£8.5billionin2018(2017:£9.0billion);fundsundermanagementof£43billionasat31December2018 (31December2017:£35.9billion). (ii) MarketandothermovementsduringtheyearforEastspringinvestmentsincludeinflowof£9.3billionfundsundermanagementfromacquisitionofTMBAssetManagementCo., (iii) Ltd.(‘TMBAM’)inThailand.SeenoteD1.2oftheconsolidatedfinancialstatementsforfurtherdetails. The£208billion(31December2017:£219.7billion)investmentproductscomprise£196.4billion(31December2017:£210.4billion)plusAsiaMoneyMarketFundsof £11.6billion(31December2017:£9.3billion). www.prudential.co.uk AnnualReport2018 Prudential plc 389 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationII Other information continued II(b) Funds under management continued (c) M&G and Eastspring Investments – total funds under management M&G,theassetmanagementbusinessofM&GPrudentialandEastspringInvestments,theGroup’sassetmanagementbusinessinAsia, managefundsfromexternalpartiesandalsofundsfortheGroup’sinsuranceoperations.Thetablebelowanalysesthetotalfundsunder managementmanagedbyM&GandEastspringInvestmentsrespectively. Externalfundsundermanagement Internalfundsundermanagement Totalfundsundermanagement M&G Eastspring Investments 31 Dec 2018 31 Dec 2017 £bn 146.9 118.2 265.1 £bn 163.9 134.6 298.5 31 Dec 2018 note £bn 31 Dec 2017 note £bn 61.1 90.2 151.3 55.9 83.0 138.9 Note TheexternalfundsundermanagementforEastspringInvestmentsincludeAsiaMoneyMarketFundsat31December2018of£11.6billion(31December2017:£9.3billion). II(c) Solvency II capital position TheestimatedGroupshareholderSolvencyIIsurplusat31December2018was£17.2billion,beforeallowingforpaymentofthe2018 secondinterimordinarydividendandreflectingapprovedregulatorytransitionalmeasuresasat31December2018. Estimated Group shareholder Solvency II capital position* OwnFunds(£bn) SolvencyCapitalRequirement(£bn) Surplus (£bn) Solvencyratio(%) 31 Dec 2018 31 Dec 2017 30.2 13.0 17.2 232% 26.4 13.1 13.3 202% *TheGroupshareholdercapitalpositionexcludesthecontributiontoOwnFundsandtheSolvencyCapitalRequirementfromringfencedwith-profitfundsandstaffpensionschemes insurplus.Theestimatedsolvencypositionsincludemanagement’scalculationofUKtransitionalmeasuresreflectingoperatingandmarketconditionsateachvaluationdate,whichfor both2018and2017reflectstheapprovedregulatoryposition. InaccordancewithSolvencyIIrequirements,theseresultsallowfor: — CapitalinJacksoninexcessof250percentoftheUSlocalRiskBasedCapitalrequirement.AsagreedwiththePrudentialRegulation Authority,thisisincorporatedintheresultaboveasfollows: – Ownfunds:representsJackson’slocalUSRiskBasedavailablecapitalless100percentoftheUSRiskBasedCapitalrequirement (CompanyActionLevel); – SolvencyCapitalRequirement:represents150percentofJackson’slocalUSRiskBasedCapitalrequirement(CompanyAction Level);and – NodiversificationbenefitsaretakenintoaccountbetweenJacksonandtherestoftheGroup. — MatchingadjustmentforUKannuitiesandvolatilityadjustmentforUSdollardenominatedHongKongwith-profitsbusiness,based onapprovalsfromthePrudentialRegulationAuthorityandcalibrationspublishedbytheEuropeanInsuranceandOccupational PensionsAuthority;and — UKtransitionalmeasures,whichhavebeenrecalculatedusingmanagement’sestimateoftheimpactofoperatingandmarket conditionsatthevaluationdate.Anapplicationtorecalculatethetransitionalmeasuresasat31December2018hasbeenapproved bythePrudentialRegulationAuthorityandthisrecalculationwillthereforebereflectedintheformalregulatoryQuantitative ReportingTemplatesasat31December2018. TheGroupshareholderSolvencyIIcapitalpositionexcludes: — AportionofSolvencyIIsurpluscapital(£1.7billionat31December2018)relatingtotheGroup’sAsianlifeoperations,primarilydue totheSolvencyIIdefinitionof‘contractboundaries’whichpreventssomeexpectedfuturecashflowsfrombeingrecognised; — ThecontributiontoOwnFundsandtheSolvencyCapitalRequirementfromring-fencedwith-profitsfundsinsurplus(representing £5.5billionofsurpluscapitalfromUKwith-profitsfundsat31December2018)andfromtheshareholders’shareoftheestateof with-profitsfunds;and — ThecontributiontoOwnFundsandtheSolvencyCapitalRequirementfrompensionfundsinsurplus. 390 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continued ItalsoexcludesunrealisedgainsoncertainderivativeinstrumentstakenouttoprotectJacksonagainstdeclinesinlong-terminterest rates.AtJackson’srequest,theDepartmentofInsuranceFinancialServicesreneweditsapprovaltocarrytheseinstrumentsatbook valueinthelocalstatutoryreturnsfortheperiod31December2018to1October2019.At31December2018,applyingthisapprovalhad theeffectofdecreasinglocalavailablestatutorycapitalandsurplus(andbyextensionSolvencyIIOwnFundsandSolvencyIIsurplus)by £0.1billion,netoftax.Thisarrangementreflectsanelectivelong-standingpracticefirstputinplacein2009,whichcanbeunwoundat Jackson’sdiscretion. The31December2018SolvencyIIresultsaboveallowforthereinsuranceof£12.0billionoftheUKannuityportfoliotoRothesayLife effectivefrom14March2018andthetransferofPrudentialplc’sHongKongsubsidiariestoPrudentialCorporationAsiaLimited.Intotal theseitemshaveresultedinadecreasetoUKSolvencyIIsurplusin2018of£3.3billionwithGroupSolvencyIIsurplusincreasingby £0.4billion. Analysis of movement in Group capital position AsummaryoftheestimatedmovementinGroupSolvencyIIsurplusfrom£13.3billionatyearend2017to£17.2billionatyearend2018 issetoutinthetablebelow.ThemovementfromtheGroupSolvencyIIsurplusat31December2016totheSolvencyIIsurplusat 31December2017isincludedforcomparison. Analysis of movement in Group shareholder surplus Estimated Solvency II surplus at beginning of year Underlyingoperatingexperience Managementactions Operatingexperience Non-operatingexperience(includingmarketmovements) M&GPrudentialtransactions Other capital movements Netsubordinateddebtissuance/redemption Foreigncurrencytranslationimpacts Dividendspaid Modelchanges Estimated Solvency II surplus at end of year 2018 Surplus  £bn 13.3 2017 Surplus  £bn 12.5 4.1 0.1 4.2 (1.2) 0.4 1.2 0.5 (1.2) 0.0 17.2 3.2 0.4 3.6 (0.6) – (0.2) (0.7) (1.2) (0.1) 13.3 TheestimatedmovementinGroupSolvencyIIsurplusover2018isdrivenby: — Operating experience of £4.2 billion: generatedbyin-forcebusinessandnewbusinesswrittenin2018,afterallowingforamortisation oftheUKtransitionalmeasuresandtheimpactofone-offmanagementoptimisationsimplementedovertheyear.Thisincludesa £0.4billionbenefitfromtheimpactofupdatestoUKlongevitybestestimateassumptionsanda£0.1billionbenefitfromaninsurance recoveryrelatingtothecostsandanyrelatedredressofreviewinginternallyvestingannuitiessoldwithoutadviceafter1July2008; — Non-operating experience of £(1.2) billion: resultingmainlyfromthenegativeimpactofmarketmovements,afterallowingforthe recalculationoftheUKtransitionalmeasuresatthevaluationdate,theimpactofUSRiskBasedCapitalupdatesannouncedinJune 2018toreflectUStaxreformchangesandthe£(0.3)billionimpactfromtheacquisitionofTMBAssetManagementCo.,Ltd. (seeIFRSFinancialStatementsnoteD1.2forfurtherinformation); — M&GPrudential transactions of £0.4 billion: thebeneficialimpactontheGroupSolvencyIIsurplusoftheUKannuitiesreinsurance transactioneffectivefrom14March2018andthetransferofPrudentialplc’sHongKongsubsidiariestoPrudentialCorporationAsia LimitedafterallowingfortheimpactofrecalculationoftheUKtransitionalmeasuresasaresultofthesetransactions; — Other capital movements: comprisinganincreaseinsurplusfromthenetimpactofdebtraisedoffsetbydebtredeemedduring2018, abenefitfromforeigncurrencytranslationandareductioninsurplusfrompaymentofdividends;and — Model changes: reflectinginternalmodelchangesapprovedbythePrudentialRegulationAuthorityandotherminorinternalmodel calibrationchangesmadein2018. www.prudential.co.uk AnnualReport2018 Prudential plc 391 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationII Other information continued II(c) Solvency II capital position continued Analysis of Group Solvency Capital Requirements ThesplitoftheGroup’sestimatedSolvencyCapitalRequirementbyrisktypeincludingthecapitalrequirementsinrespectofJackson’s riskexposuresbasedon150percentofUSRiskBasedCapitalrequirements(CompanyActionLevel)butwithnodiversificationbetween JacksonandtherestoftheGroup,isasfollows: Split of the Group’s estimated Solvency Capital Requirements Market  Equity  Credit  Yields(interestrates)  Other Insurance  Mortality/morbidity   Operational/expense FX translation Lapse Longevity 31 Dec 2018 31 Dec 2017 % of undiversified Solvency Capital Requirements % of diversified Solvency Capital Requirements % of undiversified Solvency Capital Requirements % of diversified Solvency Capital Requirements 57% 13% 23% 16% 5% 24% 5% 15% 4% 12% 7% 70% 23% 38% 6% 3% 20% 2% 17% 1% 8% 2% 57% 14% 24% 13% 6% 26% 5% 14% 7% 11% 6% 71% 23% 38% 7% 3% 21% 2% 17% 2% 7% 1% Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds IFRSshareholders’equity RestateUSinsuranceentitiesfromIFRStolocalUSstatutorybasis RemoveDAC,goodwillandintangibles Addsubordinateddebt Impactofriskmargin(netoftransitionalmeasures) Addvalueofshareholdertransfers Liabilityvaluationdifferences Increaseinnetdeferredtaxliabilitiesresultingfromliabilityvaluationdifferencesabove Other Estimated Solvency II Shareholder Own Funds 31 Dec 2018 £bn 31 Dec 2017 £bn 17.2 (2.5) (4.6) 7.2 (3.8) 5.3 13.3 (1.5) (0.4) 30.2 16.1 (3.0) (4.0) 5.8 (3.9) 5.3 12.1 (1.6) (0.4) 26.4 Thekeyitemsofthereconciliationasat31December2018are: — £(2.5)billionrepresentstheadjustmentrequiredtotheGroup’sshareholders’fundsinordertoconvertJackson’scontributionfroman IFRSbasistothelocalstatutoryvaluationbasis.Thisitemalsoreflectsade-recognitionofOwnFundsof£1.0billion,equivalenttothe valueof100percentofRiskBasedCapitalrequirements(CompanyActionLevel),asagreedwiththePrudentialRegulationAuthority; — £(4.6)billionduetotheremovalofDAC,goodwillandintangiblesfromtheIFRSbalancesheet; — £7.2billionduetotheadditionofsubordinateddebtwhichistreatedasavailablecapitalunderSolvencyIIbutasaliabilityunderIFRS; — £(3.8)billionduetotheinclusionofariskmarginforUKandAsianon-hedgeablerisks,netof£1.6billionfromtransitionalmeasures (afterallowingforrecalculationofthetransitionalmeasuresasat31December2018)whicharenotapplicableunderIFRS; — £5.3billionduetotheinclusionofthevalueoffutureshareholdertransfersfromwith-profitsbusiness(excludingtheshareholders’ shareofthewith-profitsestate,forwhichnocreditisgivenunderSolvencyII),whichisexcludedfromthedeterminationofthe Group’sIFRSshareholders’funds; — £13.3billionmainlyduetodifferencesininsurancevaluationrequirementsbetweenSolvencyIIandIFRS,withSolvencyIIOwnFunds partiallycapturingthevalueofin-forcebusinesswhichisexcludedfromIFRS; — £(1.5)billionduetotheimpactonthevaluationofnetdeferredtaxliabilitiesresultingfromtheliabilityvaluationdifferencesnoted above;and — £(0.4)billionduetootheritems,includingtheimpactofrevaluingloans,borrowingsanddebtfromIFRStoSolvencyII. 392 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continuedSensitivity analysis TheestimatedsensitivityoftheGroupshareholderSolvencyIIcapitalpositiontosignificantchangesinmarketconditionsisasfollows: Impact of market sensitivities Base position Impact of: 20%instantaneousfallinequitymarkets 40%fallinequitymarkets1 50basispointsreductionininterestrates2,3 100basispointsincreaseininterestrates3 100basispointsincreaseincreditspreads4 31 Dec 2018 31 Dec 2017 Surplus £bn Ratio Surplus £bn 17.2 (1.6) (4.0) (1.8) 1.2 (1.7) 232% (10)% (28)% (21)% 20% (9)% 13.3 0.7 (2.1) (1.0) 1.2 (1.4) Ratio 202% 9% (11)% (14)% 21% (6)% Notes 1 2 3 4 Wherehedgesaredynamic,rebalancingisallowedforbyassuminganinstantaneous20percentfallfollowedbyafurther20percentfalloverafour-weekperiod. SubjecttoafloorofzeroforAsiaandUSinterestrates. Allowingforfurthertransitionalmeasuresrecalculationaftertheinterestratestress. USRiskBasedCapitalsolvencypositionincludedusingastressof10timesexpectedcreditdefaults. TheGroupbelievesitispositionedtowithstandsignificantdeteriorationsinmarketconditionsandwecontinuetousemarkethedges tomanagesomeofthisexposureacrosstheGroup,wherewebelievethebenefitoftheprotectionoutweighsthecost.Thesensitivity analysisaboveallowsforpredeterminedmanagementactionsandthosetakentodate,butdoesnotreflectallpossiblemanagement actionswhichcouldbetakeninthefuture. UK Solvency II capital position1,2 Onthesamebasisasabove,theestimatedshareholderSolvencyIIsurplusforThePrudentialAssuranceCompanyLimited(‘PAC’)and itssubsidiaries2at31December2018was£3.7billion,afterallowingforrecalculationoftransitionalmeasuresasat31December2018. Thisrelatestoshareholder-backedbusinessincludingfuturewith-profitsshareholdertransfers,butexcludestheshareholders’shareof theestateinlinewithSolvencyIIrequirements.   Estimated UK shareholder Solvency II capital position* OwnFunds(£bn) SolvencyCapitalRequirement(£bn) Surplus (£bn) Solvencyratio(%) 31 Dec 2018 31 Dec 2017 8.8 5.1 3.7 172% 14.0 7.9 6.1 178% *TheUKshareholdercapitalpositionexcludesthecontributiontoOwnFundsandtheSolvencyCapitalRequirementfromring-fencedwith-profitfundsandstaffpensionschemes insurplus.Theestimatedsolvencypositionsincludemanagement’scalculationofUKtransitionalmeasuresreflectingoperatingandmarketconditionsateachvaluationdate,whichfor both2018and2017reflectstheapprovedregulatoryposition. ThePrudentialAssuranceCompanyLimitedshareholderSolvencyIIpositionat31December2018includestheactualimpactofthe transferofPrudentialplc’sHongKongsubsidiariestoPrudentialCorporationAsiaLimited,andtheimpactofthereinsuranceof £12.0billionoftheUKannuityportfoliotoRothesayLife.IntotaltheseitemshaveresultedinadecreasetoUKSolvencyIIsurplusin2018 of£3.3billion. UponcompletionofthePartVIItransferafurthercirca£0.1billionofSolvencyCapitalRequirementisexpectedtobereleased. WhilstthereisalargesurplusintheUKwith-profitsfunds,thisisring-fencedfromtheshareholderbalancesheetandistherefore excludedfromboththeGroupandtheUKshareholderSolvencyIIsurplusresults.TheestimatedUKwith-profitsfundsSolvencyII surplusat31December2018was£5.5billion,afterallowingforrecalculationoftransitionalmeasuresasat31December2018. Estimated UK with-profits Solvency II capital position* OwnFunds(£bn) SolvencyCapitalRequirement(£bn) Surplus (£bn) Solvencyratio(%) 31 Dec 2018 31 Dec 2017 9.7 4.2 5.5 231% 9.6 4.8 4.8 201% *Theestimatedsolvencypositionsincludemanagement’scalculationofUKtransitionalmeasuresreflectingoperatingandmarketconditionsateachvaluationdate,whichforboth2018 and2017reflectstheapprovedregulatoryposition. www.prudential.co.uk AnnualReport2018 Prudential plc 393 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationII Other information continued II(c) Solvency II capital position continued Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II Own Funds1 AreconciliationbetweentheIFRSunallocatedsurplusandSolvencyIIOwnFundsforUKwith-profitsbusinessisasfollows: Reconciliation of UK with-profits funds IFRSunallocatedsurplusofUKwith-profitsfunds Valueofshareholdertransfers Riskmargin(netoftransitionalmeasures) Othervaluationdifferences Estimated Solvency II Own Funds 31 Dec 2018 £bn 31 Dec 2017 £bn 13.3 (2.4) (1.0) (0.2) 9.7 13.5 (2.7) (0.7) (0.5) 9.6 Annual regulatory reporting TheGroupwillpublishitsSolvencyandFinancialConditionReportandrelatedquantitativetemplatesnolaterthan4June2019.The templateswillrequireustocombinetheGroupshareholdersolvencypositionwiththoseofallotherringfencedfundsacrosstheGroup. Incombiningthesesolvencypositions,thecontributiontoownfundsfromtheseringfencedfundswillbesetequaltotheiraggregate solvencycapitalrequirements,estimatedat£5.6billion(iethesolvencysurplusintheseringfencedfundswillnotbecapturedinthe templates).TherewillbenoimpactonthereportedGroupSolvencyIIsurplus. Statement of independent review in respect of Solvency II Capital Position at 31 December 2018 Themethodology,assumptionsandoverallresulthavebeensubjecttoexaminationbyKPMGLLP. Notes 1 2 3 TheUKwith-profitscapitalpositionincludesthePACwith-profitssub-fund,theScottishAmicableInsuranceFundandtheDefinedChargeParticipatingSub-Fund. TheinsurancesubsidiariesofPACarePrudentialInternationalAssuranceplcandPrudentialPensionsLimited.PrudentialGeneralInsuranceHongKongLimitedandPrudential HongKongLimitedarenolongersubsidiariesofPACfollowingthetransferoftheseHongKongsubsidiariestoPrudentialCorporationAsiaLimitedin2018. Thisreviewisseparatefromthatsetoutonpage330. II(d) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus Thetablesbelowshowhowthevalueofin-forcebusiness(VIF)generatedbythein-forcelong-termbusinessandtheassociatedrequired capitalismodelledasemergingintofreesurplusoverthenext40years.Althoughasmallamount(circa5percent)oftheGroup’s embeddedvalueemergesafterthisdate,analysisofcashflowsemergingintheyearsshowninthetablesisconsideredmostmeaningful. ThemodelledcashflowsusethesamemethodologyunderpinningtheGroup’sembeddedvaluereportingandsoaresubjecttothesame assumptionsandsensitivitiesusedtoprepareour2018results. Inadditiontoshowingtheamounts,bothdiscountedandundiscounted,expectedtobegeneratedfromallin-forcebusinessat 31December2018,thetablesalsopresenttheexpectedfuturefreesurplustobegeneratedfromtheinvestmentmadeinnewbusiness during2018overthesame40-yearperiodforlong-termbusinessoperations. 394 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continuedExpected period of emergence 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039-2043 2044-2048 2049-2053 2054-2058 Undiscounted expected generation from all in-force business* Undiscounted expected generation from new business written* 31 Dec 2018 £m Asia 1,560 1,504 1,446 1,441 1,438 1,371 1,345 1,332 1,309 1,266 1,177 1,169 1,145 1,131 1,115 1,061 1,059 1,081 1,113 1,104 6,131 5,843 5,452 4,964 US 1,584 1,674 1,737 1,674 1,625 1,629 1,407 1,249 1,224 1,143 1,056 962 798 645 422 448 242 135 94 102 320 – – – UK and Europe 593 609 591 572 555 537 521 497 472 448 425 402 379 465 435 405 375 346 319 292 1,137 696 329 157 Total 3,737 3,787 3,774 3,687 3,618 3,537 3,273 3,078 3,005 2,857 2,658 2,533 2,322 2,241 1,972 1,914 1,676 1,562 1,526 1,498 7,588 6,539 5,781 5,121 Asia 204 200 195 206 187 166 176 167 155 163 131 134 122 120 137 119 120 120 120 129 884 944 922 897 US 205 153 147 154 122 73 60 166 163 147 136 129 108 97 85 74 51 49 44 44 84 – – – UK and Europe 31 34 36 38 42 38 36 35 34 34 32 31 29 30 29 27 25 24 23 22 83 49 31 17 Total 440 387 378 398 351 277 272 368 352 344 299 294 259 247 251 220 196 193 187 195 1,051 993 953 914 Totalfreesurplusexpectedtoemerge inthenext40years 47,557 20,170 11,557 79,284 6,718 2,291 810 9,819 *TheanalysisexcludesamountsincorporatedintoVIFat31December2018wherethereisnodefinitivetimeframeforwhenthepaymentswillbemadeorreceiptsreceived.Inparticular, itexcludesthevalueoftheshareholders’interestinthewith-profitsestate.Italsoexcludesanyfreesurplusemergingafter2058. Theaboveamountscanbereconciledtothenewbusinessamountsasfollows: Undiscountedexpectedfreesurplusgenerationforyears2019to2058 Less:discounteffect Discountedexpectedfreesurplusgenerationforyears2019to2058 Discountedexpectedfreesurplusgenerationforyearsafter2058 Less:Freesurplusinvestmentinnewbusiness Otheritems* Post-taxEEVnewbusinessprofitforlong-termbusinessoperations Asia 6,718 (3,964) 2,754 863 (488) (525) 2,604 2018 £m US UK and Europe Total 2,291 (905) 1,386 – (225) (240) 921 810 (352) 458 1 (102) (5) 352 9,819 (5,221) 4,598 864 (815) (770) 3,877 *Otheritemsrepresenttheimpactofthetimevalueofoptionsandguaranteesonnewbusiness,foreignexchangeeffectsandothernon-modelleditems.Foreignexchangeeffectsarise asEEVnewbusinessprofitamountsaretranslatedataverageexchangeratesandtheexpectedfreesurplusgenerationusesyearendclosingrates. www.prudential.co.uk AnnualReport2018 Prudential plc 395 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationII Other information continued II(d) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus continued Theundiscountedexpectedfreesurplusgenerationfromallin-forcebusinessat31December2018shownbelowcanbereconciled totheamountthatwasexpectedtobegeneratedasat31December2017asfollows: Group 2017expectedfreesurplusgeneration 2018 £m 2019 £m 2020 £m 2021 £m 2022 £m 2023 £m Other £m Total £m foryears2018to2057 3,528 3,462 3,456 3,467 3,318 3,253 49,636 70,120 Less:Amountsexpectedtoberealised inthecurrentyear (3,528) – – – – – – (3,528) Add:Expectedfreesurplustobe generatedinyear2058* Foreignexchangedifferences Newbusiness Operatingmovements Non-operatingandothermovements 2018expectedfreesurplusgeneration foryears2019to2058 Asia operations 2017expectedfreesurplusgeneration – – – – – – – 129 440 (52) (242) – 132 387 (60) (128) – 137 378 (22) (186) – 132 398 23 (184) – 132 351 56 (174) 649 1,916 7,865 649 2,578 9,819 615 (354) 3,737 3,787 3,774 3,687 3,618 60,681 79,284 2018 £m 2019 £m 2020 £m 2021 £m 2022 £m 2023 £m Other £m Total £m foryears2018to2057 1,393 1,352 1,299 1,256 1,239 1,202 30,029 37,770 Less:Amountsexpectedtoberealised inthecurrentyear (1,393) – – 40 204 (24) (12) – – 40 200 (38) 3 – – 41 195 (42) (4) – – 42 206 (25) (21) – – 43 187 (22) 28 – (1,393) 610 1,304 5,726 610 1,510 6,718 2,499 2,342 1,560 1,504 1,446 1,441 1,438 40,168 47,557 – – – – – – Add:Expectedfreesurplustobe generatedinyear2058* Foreignexchangedifferences Newbusiness Operatingmovements Non-operatingandothermovements 2018expectedfreesurplusgeneration foryears2019to2058 *Excluding2018newbusiness. US operations 2017expectedfreesurplusgeneration 2018 £m 2019 £m 2020 £m 2021 £m 2022 £m 2023 £m Other £m Total £m foryears2018to2057 1,464 1,425 1,483 1,551 1,441 1,433 9,847 18,644 Less:Amountsexpectedtoberealised inthecurrentyear Foreignexchangedifferences Newbusiness Operatingmovements Non-operatingandothermovements 2018expectedfreesurplusgeneration foryears2019to2058 (1,464) – – – – – 89 205 (25) (110) – 92 153 (18) (36) – 96 147 27 (84) – 90 154 58 (69) – 89 122 85 (104) – 612 1,510 (1,464) 1,068 2,291 (93) (369) – 1,584 1,674 1,737 1,674 1,625 11,876 20,170 396 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continuedM&GPrudential insurance operations 2017expectedfreesurplusgeneration foryears2018to2056 Less:Amountsexpectedtoberealised inthecurrentyear Add:Expectedfreesurplustobe generatedinyear2058* Newbusiness Operatingmovements Non-operatingandothermovements 2018expectedfreesurplusgeneration foryears2019to2058 *Excluding2018newbusiness. 2018 £m 671 (671) – – – – – 2019 £m 685 – – 31 (3) (120) 2020 £m 674 – – 34 (4) (95) 2021 £m 660 – – 36 (7) (98) 2022 £m 2023 £m Other £m Total £m 638 – – 38 (10) (94) 618 9,760 13,706 – – 42 (7) (98) – (671) 39 629 39 810 (1,791) (2,327) 593 609 591 572 555 8,637 11,557 At31December2018,thetotalfreesurplusexpectedtobegeneratedoverthenextfiveyears(2019to2023inclusive),usingthesame assumptionsandmethodologyasthoseunderpinningour2018embeddedvaluereportingwas£18.6billion,anincreaseof£1.4billion fromthe£17.2billionexpectedoveranequivalentperiodfromtheendof2017. Thisincreaseprimarilyreflectsthenewbusinesswrittenin2018,whichisexpectedtogenerate£1,954millionoffreesurplusoverthe nextfiveyears. At31December2018,thetotalfreesurplusexpectedtobegeneratedonanundiscountedbasisinthenext40yearsis£79.3billion, upfromthe£70.1billionexpectedattheendof2017,reflectingtheeffectofnewbusinesswrittenacrossallthreebusinessoperations of£9.8billion,apositiveforeignexchangetranslationeffectof£2.6billionanda£(0.4)billionneteffectreflectingoperating,market assumptionchangesandotheritems.The£2.3billionimpactinAsiaofoperating,non-operatingandothermovementsincludesthenet benefitfromchangesinoperatingassumptionsfollowingtheannualreviewofexperience,togetherwiththebenefitofmanagement actionsandgenerallyhigherinterestratesincreasingprojectedreturns.The£(0.4)billionimpactintheUSmainlyreflectstheeffectof lowerthanexpectedseparateaccountreturnintheyear,partiallyoffsetbythepositiveeffectfrompersistencyassumptionupdatesand higherinterestratesincreasingfutureseparateaccountreturn.The£(2.3)billionimpactintheUKandEuropereflectstheeffectoflower thanassumedinvestmentreturnsonwith-profitsfundsandthereinsuranceofpartofitsshareholderannuityportfoliotoRothesayLife asdiscussedinnote17.TheoverallgrowthintheGroup’sundiscountedvalueoffreesurplusreflectsourabilitytowritebothgrowingand profitablenewbusiness. Actualunderlyingfreesurplusgeneratedin2018fromlifebusinessinforce,beforerestructuringcosts,attheendof2018was £4.4billionincluding£0.8billionofchangesinoperatingassumptionsandexperiencevariances.Thiscompareswiththeexpected2018 realisationattheendof2017of£3.5billion.IntheUKandEurope,thedifferencebetweenthetransfertofreesurplusrecognisedin2018 andthefreesurplusexpectedtobegeneratedat31December2017reflectsthereinsuranceoftheshareholderannuityportfolioto RothesayLife(asdiscussedinnote17)whichwasnotknownat2017.Thiscanbeanalysedfurtherasfollows: Transfertofreesurplusin2018 Expectedreturnonfreeassets Changesinoperatingassumptionsandexperiencevariances Underlying free surplus generated from in-force life business before restructuring costs in 2018 2018freesurplusexpectedtobegeneratedat31December2017 Asia £m 1,370 68 62 1,500 1,393 US £m UK and Europe £m 1,462 54 125 1,641 1,464 607 79 591 1,277 671 Total £m 3,439 201 778 4,418 3,528 www.prudential.co.uk AnnualReport2018 Prudential plc 397 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationII Other information continued II(d) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus continued Theequivalentdiscountedamountsoftheundiscountedexpectedtransfersfromin-forcebusinessandrequiredcapitalintofreesurplus shownpreviouslyareasfollows: Expected period of emergence 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039-2043 2044-2048 2049-2053 2054-2058 Discounted expected generation from all in-force business Discounted expected generation from new business written 31 Dec 2018 £m Asia 1,495 1,353 1,217 1,140 1,071 965 895 835 776 714 624 588 548 516 486 436 415 409 407 386 1,951 1,509 1,128 811 US 1,497 1,486 1,447 1,307 1,191 1,120 910 760 694 610 527 452 355 273 164 165 93 52 33 35 123 – – – UK and Europe 579 568 531 488 450 411 379 341 308 274 245 215 187 218 188 163 139 123 110 98 324 110 38 4 Total 3,571 3,407 3,195 2,935 2,712 2,496 2,184 1,936 1,778 1,598 1,396 1,255 1,090 1,007 838 764 647 584 550 519 2,398 1,619 1,166 815 Asia 194 176 161 159 138 116 118 106 92 92 68 65 56 52 56 47 45 43 41 43 285 251 197 153 US 198 139 126 121 92 52 41 100 92 77 67 60 46 39 32 25 16 14 12 11 26 – – – UK and Europe 31 32 33 34 35 31 28 26 24 22 20 18 16 16 14 12 10 9 8 6 21 10 2 – Total 423 347 320 314 265 199 187 232 208 191 155 143 118 107 102 84 71 66 61 60 332 261 199 153 Totaldiscountedfreesurplusexpected toemergeinthenext40years 20,675 13,294 6,491 40,460 2,754 1,386 458 4,598 TheaboveamountscanbereconciledtotheGroup’sEEVbasisfinancialstatementsasfollows: Discountedexpectedgenerationfromallin-forcebusinessforyears2019to2058 Discountedexpectedgenerationfromallin-forcebusinessforyearsafter2058 Discountedexpectedgenerationfromallin-forcebusinessat31December2018 Add:Freesurplusoflifeoperationsheldat31December2018 Less:Timevalueofguarantees Othernon-modelleditems TotalEEVforlong-termbusinessoperations 31 Dec 2018 £m 40,460 2,659 43,119 7,527 (2,427) 2,169 50,388 398 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continuedII(e) Foreign currency source of key metrics ThetablesbelowshowtheGroup’skeyfreesurplus,IFRSandEEV,metricsanalysisbycontributionbycurrencygroup: Free surplus and Group IFRS results USdollarlinked note (i) OtherAsiacurrencies TotalAsia UKsterling notes (ii),(iv) USdollar note (iv) Total Group EEV post-tax results USdollarlinked note (i) OtherAsiacurrencies TotalAsia UKsterling notes (ii),(iv) USdollar note (iv) Total Underlying free surplus generated for total insurance and asset management operations note(iii) 15% 13% 28% 39% 33% IFRS pre-tax operating profit notes(ii),(iv) IFRS shareholders’ funds notes(ii),(iv) 28% 17% 45% 15% 40% 22% 15% 37% 49% 14% 100% 100% 100% New business profit Operating profit notes(ii),(iv) Shareholders’ funds notes(i),(iv) 57% 10% 67% 9% 24% 53% 7% 60% 12% 28% 40% 10% 50% 26% 24% 100% 100% 100% Notes (i) (ii) (iii) (iv) USdollarlinkedcomprisetheHongKongandVietnamoperationswherethecurrenciesarepeggedtotheUSdollarandtheMalaysiaandSingaporeoperationswherethe currenciesaremanagedagainstabasketofcurrenciesincludingtheUSdollar. Foroperatingprofitandshareholders’funds,UKsterlingincludesamountsinrespectofM&GPrudentialandotheroperations(includingcentraloperationsandPrudentialCapital). OperatingprofitforcentraloperationsincludesamountsforcorporateexpenditureforGroupHeadOfficeaswellasAsiaRegionalHeadOfficewhichisincurredinHKdollarsas wellasrestructuringcostsincurredbytheGroup. Foroperatingfreesurplusgeneration,UKsterlingincludesamountsinrespectofrestructuringcostsincurredbyinsuranceandassetmanagementoperations. Forshareholders’funds,theUSdollargroupingincludesUSdollardenominatedcorestructuralborrowings.Sterlingoperatingprofitsincludeallinterestpayableassterling denominated,reflectinginterestratecurrencyswapsinplace. II(f) Option schemes TheGrouppresentlygrantsshareoptionsthroughfourschemes,andexercisesoftheoptionsaresatisfiedbytheissueofnewshares. ExecutivedirectorsandeligibleemployeesbasedintheUKmayparticipateinthePrudentialSavings-RelatedShareOptionScheme. ExecutivesandeligibleemployeesbasedinAsiaaswellaseligibleemployeesbasedinEuropecanparticipateinthePrudential InternationalSavings-RelatedShareOptionScheme,whileagentsbasedincertainregionsofAsiacanparticipateinthePrudential InternationalSavings-RelatedShareOptionSchemeforNon-Employees.EmployeesbasedinDublinareeligibletoparticipateinthe PrudentialInternationalAssuranceSharesavePlan,whichcurrentlyhasnooutstandingoptionsinissue.Furtherdetailsoftheschemes andaccountingpoliciesaredetailedinnoteB2.2oftheIFRSbasisconsolidatedfinancialstatements. Alloptionsweregrantedat£nilconsideration.Nooptionshavebeengrantedtosubstantialshareholders,suppliersofgoodsor services(excludingoptionsgrantedtoagentsunderthePrudentialInternationalSavings-RelatedShareOptionSchemeforNon- employees)orinexcessoftheindividuallimitfortherelevantscheme. Theoptionsschemeswillterminateasfollows,unlessthedirectorsresolvetoterminatetheplansatanearlierdate: — PrudentialSavings-RelatedShareOptionScheme:16May2023; — PrudentialInternationalSavings-RelatedShareOptionScheme:19May2021; — PrudentialInternationalAssuranceSharesavePlan:3August2019;and — PrudentialInternationalSavings-RelatedShareOptionSchemeforNon-Employees2012:12May2022. TheweightedaveragesharepriceofPrudentialplcfortheyearended31December2018was£17.36(2017:£17.51). ParticularsofoptionsgrantedtodirectorsareincludedintheDirectors’remunerationreportonpage154. Theclosingpriceofthesharesimmediatelybeforethedateonwhichtheoptionsweregrantedduringtheyearwas£16.81. Thefollowinganalysesshowthemovementinoptionsforeachoftheoptionschemesfortheyearended31December2018. www.prudential.co.uk AnnualReport2018 Prudential plc 399 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information II Other information continued II(f) Option schemes continued Prudential Savings-Related Share Option Scheme Exercise period Number of options Date of grant Exercise price £ 21Sep12 20Sep13 23Sep14 23Sep14 22Sep15 22Sep15 21Sep16 21Sep16 21Sep17 21Sep17  6.29  9.01 11.55 11.55 11.11 11.11 11.04 11.04 14.55 14.55 Beginning End 01Dec17 31May18 01Dec18 31May19 01Dec17 31May18 01Dec19 31May20 01Dec18 31May19 01Dec20 31May21 01Dec19 31May20 01Dec21 31May22 01Dec20 31May21 01Dec22 31May23 Beginning of year 25,239 66,202 156,359 359,247 847,546 213,547 663,871 145,658 809,303 138,097 Granted Exercised Cancelled Forfeited Lapsed End of year (24,762) – – (37,927) – (156,048) – (36,474) – (553,825) (13,870) – (34,921) – (5,372) – (13,978) – (1,226) – – – – (3,409) (9,443) (4,185) (44,340) (7,224) (58,878) (11,849) – – – (2,901) (19,537) (4,266) (21,317) (2,715) (23,350) (3,833) (477) (543) (311) (12,747) (7,997) (10,700) (24,366) (9,242) (44,821) (5,842) – 27,732 – 303,716 256,744 180,526 538,927 121,105 668,276 115,347 3,425,069 – (878,403) (139,328) (77,919) (117,046) 2,212,373 Thetotalnumberofsecuritiesavailableforissueundertheschemeis2,212,373whichrepresents0.085percentoftheissuedshare capitalat31December2018. Theweightedaverageclosingpriceofthesharesimmediatelybeforethedatesonwhichtheoptionswereexercisedduringthe currentperiodwas£16.22. Therewerenooptionsgrantedundertheplanduringthecurrentperiod. Prudential International Savings-Related Share Option Scheme Exercise period Number of options Granted Exercised Cancelled Forfeited Lapsed End of year Date of grant Exercise price £ 21Sep12 20Sep13 23Sep14 23Sep14 22Sep15 22Sep15 21Sep16 21Sep17 21Sep17 18Sep18 18Sep18  6.29  9.01 11.55 11.55 11.11 11.11 11.04 14.55 14.55 13.94 13.94 Beginning End 01Dec17 31May18 01Dec18 31May19 01Dec17 31May18 01Dec19 31May20 01Dec18 31May19 01Dec20 31May21 01Dec19 31May20 01Dec20 31May21 01Dec22 31May23 01Dec21 31May22 01Dec23 31May24 Beginning of year 662 38,352 2,414 4,464 23,556 3,240 15,516 12,542 3,298 – – – – – – – – – – – 22,005 1,076 (662) (14,364) (2,414) – (13,836) – – – – – – – (4,659) – (51) (4,860) (540) (4,088) (2,722) – – – – (942) – – – – (652) – – – – 104,044 23,081 (31,276) (16,920) (1,594) – – – – – – – – – – – – – 18,387 – 4,413 4,860 2,700 10,776 9,820 3,298 22,005 1,076 77,335 Thetotalnumberofsecuritiesavailableforissueundertheschemeis77,335whichrepresents0.003percentoftheissuedsharecapital at31December2018. Theweightedaverageclosingpriceofthesharesimmediatelybeforethedatesonwhichtheoptionswereexercisedduringthe currentperiodwas£15.80. Theweightedaveragefairvalueofoptionsgrantedundertheplanintheperiodwas£3.13. 400 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continuedPrudential International Assurance Sharesave Plan Therearenosecuritiesavailableforissueundertheschemeat31December2018. Prudential International Savings-Related Share Option Scheme for Non-Employees Exercise period Number of options Date of grant Exercise price £ 21Sep12 20Sep13 23Sep14 23Sep14 22Sep15 22Sep15 21Sep16 21Sep16 21Sep17 21Sep17 18Sep18 18Sep18  6.29  9.01 11.55 11.55 11.11 11.11 11.04 11.04 14.55 14.55 13.94 13.94 Beginning End 01Dec17 31May18 01Dec18 31May19 01Dec17 31May18 01Dec19 31May20 01Dec18 31May19 01Dec20 31May21 01Dec19 31May20 01Dec21 31May22 01Dec20 31May21 01Dec22 31May23 01Dec21 31May22 01Dec23 31May24 Beginning of year 15,264 388,250 237,637 472,145 452,343 383,962 329,712 198,415 267,661 174,351 – – – – – – – – – – – – 184,780 118,243 (15,264) (148,769) (236,372) – (181,067) – – – – – – – – (3,494) (1,265) (12,980) (9,784) (7,290) (671) (1,358) (2,731) (2,060) – – – – – – – – (2,445) – (1,103) – – – 2,919,740 303,023 (581,472) (41,633) (3,548) – – – – (14) – – – – – – – (14) – 235,987 – 459,165 261,478 376,672 326,596 197,057 263,827 172,291 184,780 118,243 2,596,096 Granted Exercised Cancelled Forfeited Lapsed End of year Thetotalnumberofsecuritiesavailableforissueundertheschemeis2,596,096whichrepresents0.100percentoftheissuedshare capitalat31December2018. Theweightedaverageclosingpriceofthesharesimmediatelybeforethedatesonwhichtheoptionswereexercisedduringthe currentperiodwas£16.72. Theweightedaveragefairvalueofoptionsgrantedundertheplanintheperiodwas£3.30. II(g) Selected historical financial information of Prudential ThefollowingtablesetsforthPrudential’sselectedconsolidatedfinancialdatafortheperiodsindicated.Certaindataisderivedfrom Prudential’sauditedconsolidatedfinancialstatementspreparedinaccordancewithInternationalFinancialReportingStandards(IFRS) asissuedbytheInternationalAccountingStandardsBoard(IASB)andasadoptedbytheEuropeanUnion(EU)andEuropeanEmbedded Value(EEV). ThistableisonlyasummaryandshouldbereadinconjunctionwithPrudential’sconsolidatedfinancialstatementsandtherelated notesincludedelsewhereinthisdocument. www.prudential.co.uk AnnualReport2018 Prudential plc 401 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationII Other information continued II(g) Selected historical financial information of Prudential continued Income statement data      IFRS basis results  Grosspremiumsearned Outwardreinsurancepremiums note (v) Earnedpremiums,netofreinsurance Investmentreturn Otherincome note (vi) Totalrevenue,netofreinsurance Benefitsandclaimsandmovementinunallocatedsurplus ofwith-profitsfunds,netofreinsurance Acquisitioncostsandotherexpenditure note (vi) Financecosts:interestoncorestructuralborrowings ofshareholder-financedbusinesses (Loss)gainondisposalofbusinessesandcorporatetransactions Re-measurementofthesoldKorealifebusiness Totalcharges,netofreinsuranceand(loss)gainondisposal 2018 £m 2017 £m 2016 £m 2015 £m 2014 £m 47,224 (14,023) 33,201 (10,263) 1,993 24,931 44,005 (2,062) 41,943 42,189 2,258 86,390 38,981 (2,020) 36,961 32,511 2,246 71,718 36,663 (1,157) 35,506 3,304 2,356 41,166 32,832 (799) 32,033 25,787 2,137 59,957 (12,568) (8,855) (72,532) (9,993) (59,366) (8,724) (29,656) (8,069) (50,169) (6,583) (410) (80) – (425) 223 5 (360) – (238) (312) (46) – (341) (13) – ofbusinesses (21,913) (82,722) (68,688) (38,083) (57,106) Shareofprofitsfromjointventuresandassociates, netofrelatedtax Profitbeforetax (being tax attributable to shareholders’ and policyholders’ returns) note (i) Taxcredit(charges)attributabletopolicyholders’returns Profitbeforetaxattributabletoshareholders Taxchargesattributabletoshareholders’returns Profitfortheyear Basedonprofitfortheyearattributabletotheequityholders oftheCompany(inpence): Basicearningspershare Dilutedearningspershare Dividendpersharedeclaredandpaidinreportingperiod Interimordinarydividend/finalordinarydividend  Specialdividend  Supplementary IFRS income statement data Operatingprofitbasedonlonger-terminvestmentreturns note (ii) Non-operatingitems Profitbeforetaxattributabletoshareholders Operatingearningspershare(inpence) Supplementary EEV income statement data (post-tax)      Operatingprofitbasedonlonger-terminvestmentreturns note (ii) Non-operatingitems Profitattributabletoshareholders Operatingearningspershare(inpence)  291 302 182 238 303 3,309 326 3,635 (622) 3,013 3,970 (674) 3,296 (906) 2,390 3,212 (937) 2,275 (354) 1,921 3,321 (173) 3,148 (569) 2,579 3,154 (540) 2,614 (398) 2,216 2018 2017 2016 2015 2014 116.9p 116.8p 48.17p 48.17p – 93.1p 93.0p 45.07p 45.07p – 75.0p 75.0p 49.40p 39.40p 10.00p 101.0p 100.9p 38.05p 38.05p – 86.9p 86.8p 35.03p 35.03p – 2018 £m 2017 £m 2016 £m 2015 £m 2014 £m 4,827 (1,192) 3,635 156.6p 4,699 (1,403) 3,296 145.2p 4,256 (1,981) 2,275 131.3p 3,969 (821) 3,148 124.6p 3,154 (540) 2,614 95.7p 2018 £m 2017 £m 2016 £m 2015 £m 2014 £m 7,563 (2,975) 4,588 6,598 2,153 8,751 5,497 (981) 4,516 4,840 (889) 3,951 4,108 235 4,343 293.6p 257.0p 214.7p 189.6p 161.2p 402 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continued New business data Annualpremiumequivalent(APE)sales EEVnewbusinessprofit(NBP)(post-tax) NBPmargin(%ofAPE) Statement of financial position data 2018 £m 2017 £m 2016 £m 2015 £m 2014 £m 6,802 3,877 57% 6,958 3,616 52% 6,320 3,088 49% 5,466 2,609 48% 4,514 2,104 47% 31 December 2018 £m 2017 £m 2016 £m 2015 £m 2014 £m Totalassets Totalpolicyholderliabilitiesandunallocatedsurplusof with-profitsfunds Corestructuralborrowingsofshareholder-financedbusinesses Totalliabilities Totalequity 508,645 493,941 470,498 386,985 369,204 425,146 7,664 491,378 17,267 428,194 6,280 477,847 16,094 403,313 6,798 455,831 14,667 335,614 5,011 374,029 12,956 321,989 4,304 357,392 11,812 Other data   31 December     2018 £bn 2017 £bn 2016 £bn 2015 £bn 2014 £bn Fundsundermanagement note (iii) EEVshareholders’equity,excludingnon-controllinginterests GroupshareholderSolvencyIIsurplus note (iv) InsuranceGroupsDirectivecapitalsurplusbeforefinaldividend 657 49.8 17.2 n/a 669 45 13.4 n/a 602 39.0 12.5 n/a 509 32.4 9.7 5.5 496 29.2 n/a 4.7 Notes (i) (ii) Operatingprofitsaredeterminedonthebasisofincludinglonger-terminvestmentreturns.EEVandIFRSoperatingprofitsarestatedafterexcludingtheeffectofshort-term Thismeasureistheformalprofit(loss)beforetaxmeasureunderIFRSbutisnottheresultattributabletoshareholders. fluctuationsininvestmentreturnsagainstlong-termassumptions,gainondilutionoftheGroup’sholdings,thecostsarisingfromthedomesticationoftheHongKongbusiness, profit(loss)attachingtothesaleofJapanlifeandprofit(loss)attachingtotheheldforsaleKorealifebusiness.SeparatelyontheIFRSbasis,operatingprofitalsoexcludes amortisationofacquisitionaccountingadjustments.Inaddition,forEEVbasisresults,operatingprofitexcludestheeffectofchangesineconomicassumptions,themarketvalue movementoncoreborrowingsandin2012,thegainarisingontheacquisitionofREALIC. FundsundermanagementcomprisefundsoftheGroupheldinthestatementoffinancialpositionandexternalfundsthataremanagedbyPrudentialassetmanagementoperations. The2018surplusisestimated. (iii) (iv) (v) Outwardreinsurancepremiumsof£(14,023)millionincludes£(12,149)millionpaidduringtheyearinrespectofthereinsuranceoftheUKannuityportfolio.SeenoteD1.1ofthe IFRSfinancialstatementsforfurtherdetails. Thecomparativeresultsfrom2014to2017havebeenre-presentedfromthosepreviouslypublishedforthedeductionofcertainexpensesagainstrevenuefollowingtheadoption ofIFRS15.SeenoteA2oftheIFRSfinancialstatements. (vi)  III Calculation of alternative performance measures Theannualreportusesalternativeperformancemeasures(APMs)toprovidemorerelevantexplanationsoftheGroup’sfinancialposition andperformance.ThissectionsetsoutexplanationsforeachAPMandreconciliationstorelevantIFRSbalances. III(a) Reconciliation of adjusted IFRS operating profit based on longer-term investment returns to profit before tax Theannualreportusesalternativeperformancemeasures(APMs)toprovidemorerelevantexplanationsoftheGroup’sfinancialposition andperformance.ThissectionsetsoutexplanationsforeachAPMandreconciliationstorelevantIFRSbalances. AdjustedIFRSoperatingprofitattributabletoshareholdersbasedonlonger-terminvestmentreturnspresentstheoperating performanceofthebusiness.ThismeasurementbasisadjustsforthefollowingitemswithintotalIFRSprofitbeforetax: — Short-termfluctuationsininvestmentreturnsonshareholder-backedbusiness; — Amortisationofacquisitionaccountingadjustmentsarisingonthepurchaseofbusiness;and — Gainorlossoncorporatetransactions,suchasdisposalsundertakenintheyear. MoredetailsonhowadjustedIFRSoperatingprofitbasedonlonger-terminvestmentreturnsisdeterminedareincludedinnoteB1.3 oftheIFRSfinancialstatements. www.prudential.co.uk AnnualReport2018 Prudential plc 403 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information III Calculation of alternative performance measures continued III(b) Calculation of return on IFRS shareholders’ funds ReturnonIFRSshareholders’fundsiscalculatedasoperatingprofitbasedonlonger-terminvestmentreturnsnetoftaxandnon-controlling interestsdividedbyopeningshareholders’funds.Operatingprofitbasedonlonger-terminvestmentreturnsisreconciledtoIFRSprofit beforetaxinnoteB1totheIFRSfinancialstatements. Operatingprofitbasedonlonger-terminvestmentreturns Taxonoperatingprofit Profitattributabletonon-controllinginterests Operatingprofitbasedonlonger-terminvestmentreturns, netoftaxandnon-controllinginterests Openingshareholders’funds Return on shareholders’ funds Note B1.1 2018 £m 2017 £m 4,827 (792) (3) 4,032 16,087 25% 4,699 (971) (1) 3,727 14,666 25% III(c) Calculation of IFRS gearing ratio Gearingratioiscalculatedasnetcorestructuralborrowingsofshareholder-financedoperationsdividedbyclosingIFRSshareholders’ fundsplusnetcorestructuralborrowings. Corestructuralborrowingsofshareholder-financedoperations Less:Holdingcompanycashandshort-terminvestments Net core structural borrowings of shareholder-financed operations Closingshareholders’funds Shareholders’ funds plus net core structural borrowings Gearing ratio Note C6.1 II(a) 31 Dec 2018 £m 31 Dec 2017 £m 7,664 (3,236) 4,428 17,249 21,677 20% 6,280 (2,264) 4,016 16,087 20,103 20% III(d) Calculation of IFRS shareholders’ funds per share IFRSshareholders’fundspershareiscalculatedasclosingIFRSshareholders’fundsdividedbythenumberofissuedsharesatthe balancesheetdate. Closingshareholders’funds(£million) Numberofissuedsharesatyearend(millions) Shareholders’ funds per share (pence) Note 31 Dec 2018 31 Dec 2017 C10 17,249 2,593 665 16,087 2,587 622 III(e) Calculation of asset management cost/income ratio Theassetmanagementcost/incomeratioiscalculatedasassetmanagementoperatingexpenses,adjustedforcommissionandjoint venturecontribution,dividedbyassetmanagementtotalIFRSrevenueadjustedforcommission,jointventurecontribution, performance-relatedfeesandnon-operatingitems. Operating income used in cost/income ratio Commission Performance-relatedfees Investmentreturn Short-termfluctuationsininvestmentreturnsonshareholder-backedbusiness Total IFRS revenue Operating expense used in cost/income ratio Investmentreturn Commission Charges Cost/income ratio – Operating expense/operating income M&GPrudential asset management 2018 £m 2017 £m 1,100 313 15 (14) (15) 1,399 654 (14) 313 953 59% 1,034 351 53 – 6 1,444 602 – 351 953 58% 404 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continuedOperating income before performance-related fees used in cost/income ratio Shareofjointventurerevenue Commission Performance-relatedfees Total IFRS revenue Operating expense used in cost/income ratio Shareofjointventureexpense Commission IFRS charges Cost/income ratio – Operating expense/operating income before performance-related fees Eastspring Investments 2018 £m 2017 £m 424 (188) 118 17 371 232 (100) 118 250 55% 421 (176) 103 17 365 238 (92) 103 249 56% III(f) Reconciliation of Asia renewal insurance premium to gross earned premiums AsiarenewalinsurancepremiumiscalculatedasIFRSgrossearnedpremiumslessnewbusinesspremiumsandadjustedforthe contributionfromjointventures. Asia renewal insurance premium Add:Generalinsurancepremium Add:IFRSgrossearnedpremiumfromnewregularandsingle premiumbusiness Less:Renewalpremiumsfromjointventures Add:premiumsrelatingtosoldKorealifebusiness AsiasegmentIFRSgrossearnedpremium Note B1.4 2018 £m 12,856 90 4,809 (1,286) – 16,469 AER 2017 £m 11,482 89 4,986 (1,068) 199 15,688 CER 2017 £m 11,087 87 4,819 (1,022) 197 15,168 III(g) Reconciliation of APE new business sales to earned premiums TheGroupreportsAPEnewbusinesssalesasameasureofthenewpoliciessoldintheyear.ThisdiffersfromtheIFRSmeasureof premiumsearnedasshownbelow:    Annual premium equivalents as published Adjustmenttoinclude100%ofsinglepremiumsonnewbusinesssoldintheyear note (i) Premiumsfromin-forcebusinessandotheradjustments note (ii) Gross premiums earned Outwardreinsurancepremiums note (iii) Earned premiums, net of reinsurance as shown in the IFRS financial statements Note B1.4 B1.4 B1.4 2018 £m 6,802 28,009 12,413 47,224 (14,023) 33,201 2017 £m 6,958 28,769 8,278 44,005 (2,062) 41,943 APEnewbusinesssalesonlyincludeonetenthofsinglepremiums,recordedonpoliciessoldintheyear.Grosspremiumsearnedinclude100percentofsuchpremiums. Notes (i) (ii) Otheradjustmentsprincipallyincludeamountsinrespectofthefollowing:  –Grosspremiumsearnedincludepremiumsfromexistingin-forcebusinessaswellasnewbusiness.ThemostsignificantamountisrecordedinAsia,whereasignificantportion ofregularpremiumbusinessiswritten.Asiain-forcepremiumsformthevastmajorityoftheotheradjustmentamount;     –InOctober2018,Jacksonenteredintoa100percentreinsuranceagreementwithJohnHancockLifeInsuranceCompanytoacquireaclosedblockofgrouppay-outannuity business.Thetransactionresultedinanadditiontogrosspremiumsearnedof£3.7billion.NoamountswereincludedinAPEnewbusinesssales. –APEincludesnewpolicieswrittenintheyearwhichareclassifiedasinvestmentcontractswithoutdiscretionaryparticipationfeaturesunderIFRS4,arisingmainlyinJackson forguaranteedinvestmentcontractsandinM&GPrudentialforcertainunit-linkedsavingsandsimilarcontracts.Theseareexcludedfromgrosspremiumsearnedandrecorded asdeposits; –APEnewbusinesssalesareannualisedwhilegrosspremiumsearnedarerecordedonlywhenrevenuesaredue;and –ForthepurposeofreportingAPEnewbusinesssales,weincludetheGroup’sshareofamountssoldbytheGroup’sinsurancejointventuresandassociates.UnderIFRS, jointventuresandassociatesareequityaccountedandsonoamountsareincludedwithingrosspremiumsearned. (iii) Outwardreinsurancepremiumsin2018include£(12,149)millioninrespectofthereinsuranceoftheUKannuityportfolio. www.prudential.co.uk AnnualReport2018 Prudential plc 405 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationIII Calculation of alternative performance measures continued III(h) Reconciliation between IFRS and EEV shareholders’ funds ThetablebelowshowsthereconciliationofEEVshareholders’fundsandIFRSshareholders’fundsattheendoftheyear: EEV shareholders’ funds Less:Valueofin-forcebusinessoflong-termbusiness note (i) DeferredacquisitioncostsassignedzerovalueforEEVpurposes Other note (ii) IFRS shareholders’ funds 31 Dec 2018 £m 31 Dec 2017 £m 49,782 (33,013) 10,077 (9,597) 17,249 44,698 (29,410) 9,227 (8,428) 16,087 Notes (i) TheEEVshareholders’fundscomprisesthepresentvalueoftheshareholders’interestinthevalueofin-forcebusiness,networthoflong-termbusinessoperationsandIFRS shareholders’fundsofassetmanagementandotheroperations.Thevalueofin-forcebusinessreflectsthepresentvalueoffutureshareholdercashflowsfromlong-termin-force businesswhicharenotcapturedasshareholders’interestonanIFRSbasis.NetworthrepresentsthenetassetsforEEVreportingpurposesthatreflecttheregulatorybasisposition, sometimeswithadjustmentstoachieveconsistencywiththeIFRStreatmentofcertainitems. (ii) OtheradjustmentsrepresentassetandliabilityvaluationdifferencesbetweenIFRSandthelocalregulatoryreportingbasisusedtovaluenetworthforlong-terminsurance  operations.FortheUK,thiswouldbethedifferencebetweenIFRSandSolvencyII. ItalsoincludesthemarktomarketoftheGroup’scorestructuralborrowingswhicharefairvaluedunderEEVbutnotIFRS.Themostsignificantvaluationdifferencesrelateto changesinthevaluationofinsuranceliabilities.Forexample,inJacksonwhereIFRSliabilitiesarehigherthanthelocalregulatorybasisastheyareprincipallybasedonpolicyholder accountbalances(withadeferredacquisitioncostsrecognisedasanasset)whereasthelocalregulatorybasisusedforEEVisbasedonfuturecashflowsduetothepolicyholder onaprudentbasiswithconsiderationofanexpenseallowanceasapplicable,butwithnoseparatedeferredacquisitioncostasset. III(i) Reconciliation of EEV operating profit based on longer-term investment returns Totheextentapplicable,thepresentationoftheEEVpost-taxprofitfortheyearisconsistentintheclassificationbetweenoperatingand non-operatingresultswiththebasisthattheGroupappliesfortheanalysisofIFRSbasisresults.Operatingresultsreflectunderlying resultsincludinglonger-terminvestmentreturns,whicharedeterminedfollowingtheEEVPrinciplesissuedbytheEuropeanInsurance CFOForum. Non-operatingresultscomprise: — Short-termfluctuationsininvestmentreturns; — Themarktomarketvaluemovementsoncorestructuralborrowings; — Theeffectofchangesineconomicassumptions;and — Theimpactofcorporatetransactionsundertakenintheyear. MoredetailsonhowEEVpost-taxprofitisdeterminedandthecomponentsofEEVoperatingprofitareincludedinnote13oftheEEV supplementarybasisofresults. III(j) Calculation of return on embedded value ReturnonembeddedvalueiscalculatedastheEEVpost-taxoperatingprofitbasedonlonger-terminvestmentreturns,asapercentage ofopeningEEVbasisshareholders’funds. EEVoperatingprofitbasedonlonger-terminvestmentreturns(£million) OpeningEEVbasisshareholders’funds(£million) Return on embedded value (%) Note 2 8 2018 7,563 44,698 17% 2017 6,598 38,968 17% III(k) Calculation of EEV shareholders’ funds per share EEVshareholders’fundspershareiscalculatedasclosingEEVshareholders’fundsdividedbythenumberofissuedsharesatthebalance sheetdate.EEVshareholders’fundspershareexcludinggoodwillattributabletoshareholdersiscalculatedinthesamemanner,except goodwillattributabletoshareholdersisdeductedfromclosingEEVshareholders’funds. ClosingEEVshareholders’funds(£million) Less:Goodwillattributabletoshareholders(£million) ClosingEEVshareholders’fundsexcludinggoodwillattributabletoshareholders(£million) Numberofissuedsharesatyearend(millions) Shareholders’ funds per share (in pence) Shareholders’ funds per share excluding goodwill attributable to shareholders (in pence) Note 31 Dec 2018 31 Dec 2017 8 8 49,782 (1,651) 48,131 2,593 1,920p 44,698 (1,458) 43,240 2,587 1,728p 1,856p 1,671p 406 Prudential plc AnnualReport2018 www.prudential.co.uk Additional unaudited financial information continuedRisk factors AnumberofriskfactorsaffectPrudential’s operatingresultsandfinancialcondition and,accordingly,thetradingpriceofits shares.Theriskfactorsmentionedbelow shouldnotberegardedasacompleteand comprehensivestatementofallpotential risksanduncertainties.Theinformation givenisasofthedateofthisdocument, andanyforward-lookingstatementsare madesubjecttothereservationsspecified under‘Forward-lookingstatements’. Prudential’sapproachestomanaging risksareexplainedinthesectionofthis documentheaded‘GroupChiefRisk Officer’sReportoftherisksfacingour businessandhowthesearemanaged’. Risks relating to Prudential’s business Prudential’s businesses are inherently subject to market fluctuations and general economic conditions Uncertainty,fluctuationsornegative trendsininternationaleconomicand investmentclimatescouldhaveamaterial adverseeffectonPrudential’sbusiness andprofitability.Prudentialoperatesina macroeconomicandglobalfinancialmarket environmentthatpresentssignificant uncertaintiesandpotentialchallenges. Forexample,governmentinterestrates intheUS,theUKandsomeAsiancountries inwhichPrudentialoperatesremainlow relativetohistoricallevels. Globalfinancialmarketsaresubjectto uncertaintyandvolatilitycreatedbya varietyoffactors.Thesefactorsinclude thecontinuingreductioninaccommodative monetarypoliciesintheUS,theUKand otherjurisdictionstogetherwithitsimpact onthevaluationofallassetclasses,effects oninterestratesandtheriskofdisorderly repricingofinflationexpectations andglobalbondyields,concernsover sovereigndebt,ageneralslowingin worldgrowth,theincreasedlevelof geopoliticalriskandpolicy-related uncertainty(includingtheimpositionof tradebarriers)andpotentiallynegative socio-politicalevents. Theadverseeffectsofsuchfactorscould befeltprincipallythroughthefollowing items: — Reducedinvestmentreturnsarising ontheGroup’sportfoliosincluding impairmentofdebtsecuritiesandloans, whichcouldreducePrudential’scapital andimpairitsabilitytowritesignificant volumesofnewbusiness,increasethe potentialadverseimpactofproduct guarantees,and/orhaveanegative impactonitsassetsundermanagement andprofit; — Highercreditdefaultsandwidercredit andliquidityspreadsresultingin realisedandunrealisedcreditlosses; — Failureofcounterpartieswhohave transactionswithPrudential(egbanks andreinsurers)tomeetcommitments thatcouldgiverisetoanegativeimpact onPrudential’sfinancialpositionand ontheaccessibilityorrecoverability ofamountsdueor,forderivative transactions,adequatecollateralnot beinginplace; — Estimatesofthevalueoffinancial instrumentsbecomingmoredifficult becauseincertainilliquidorclosed markets,determiningthevalueat whichfinancialinstrumentscanbe realisedishighlysubjective.Processes toascertainsuchvaluesrequire substantialelementsofjudgement, assumptionsandestimates(which maychangeovertime);and — Increasedilliquidity,whichalsoadds touncertaintyovertheaccessibility offinancialresourcesandmayreduce capitalresourcesasvaluationsdecline. Thiscouldoccurwhereexternalcapital isunavailableatsustainablecost, increasedliquidassetsarerequiredto beheldascollateralunderderivative transactionsorredemptionrestrictions areplacedonPrudential’sinvestments inilliquidfunds.Inaddition,significant redemptionrequestscouldalsobe madeonPrudential’sissuedfundsand whilethismaynothaveadirectimpact ontheGroup’sliquidity,itcouldresultin reputationaldamagetoPrudential.The potentialimpactofincreasedilliquidity ismoreuncertainthanforotherrisks suchasinterestrateorcreditrisk. Ingeneral,upheavalsinthefinancial marketsmayaffectgenerallevelsof economicactivity,employmentand customerbehaviour.Asaresult,insurers mayexperienceanelevatedincidenceof claims,lapses,orsurrendersofpolicies, andsomepolicyholdersmaychooseto deferorstoppayinginsurancepremiums. Thedemandforinsuranceproductsmay alsobeadverselyaffected.Inaddition, theremaybeahigherincidenceof counterpartyfailures.Ifsustained,this environmentislikelytohaveanegative impactontheinsurancesectorovertime andmayconsequentlyhaveanegative impactonPrudential’sbusinessandits balancesheetandprofitability.For example,thiscouldoccuriftherecoverable valueofintangibleassetsforbancassurance agreementsanddeferredacquisitioncosts arereduced.Newchallengesrelatedto marketfluctuationsandgeneraleconomic conditionsmaycontinuetoemerge. Forsomenon-unit-linkedinvestment products,inparticularthosewritteninsome oftheGroup’sAsiaoperations,itmaynotbe possibletoholdassetswhichwillprovide cashflowstomatchthoserelatingto policyholderliabilities.Thisisparticularly trueinthosecountrieswherebondmarkets arenotdevelopedandincertainmarkets whereregulatedpremiumandclaimvalues aresetwithreferencetotheinterestrate environmentprevailingatthetimeofpolicy issue.Thisresultsinamismatchduetothe durationanduncertaintyoftheliabilitycash flowsandthelackofsufficientassetsofa suitableduration.Whilethisresidualasset/ liabilitymismatchriskcanbemanaged,it cannotbeeliminated.Whereinterestrates inthesemarketsremainlowerthanthose usedtocalculatepremiumandclaimvalues overasustainedperiod,thiscouldhave amaterialadverseeffectonPrudential’s reportedprofit. Jacksonwritesasignificantamountof variableannuitiesthatoffercapitalor incomeprotectionguarantees.Thevalue oftheseguaranteesisaffectedbymarket factors(suchasinterestrates,equityvalues, bondspreadsandrealisedvolatility)and policyholderbehaviour.Jacksonusesa derivativehedgingprogrammetoreduce itsexposuretomarketrisksarisingonthese guarantees.Therecouldbemarket circumstanceswherethederivativesthat Jacksonentersintotohedgeitsmarket risksmaynotcoveritsexposuresunderthe guarantees.Thecostoftheguarantees thatremainunhedgedwillalsoaffect Prudential’sresults. www.prudential.co.uk AnnualReport2018 Prudential plc 407 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationInaddition,Jacksonhedgestheguarantees onitsvariableannuitybookonan economicbasis(withconsiderationof thelocalregulatoryposition)and,thus, acceptsvariabilityinitsaccountingresults intheshortterminordertoachievethe appropriateresultonthesebases. Inparticular,forPrudential’sGroupIFRS reporting,themeasurementoftheJackson variableannuityguaranteesistypicallyless sensitivetomarketmovementsthanfor thecorrespondinghedgingderivatives, whichareheldatmarketvalue.However, dependingonthelevelofhedging conductedregardingaparticularrisktype, certainmarketmovementscandrive volatilityintheeconomicorlocalregulatory resultsthatmaybelesssignificantunder IFRSreporting. Also,Jacksonhasasignificantspread basedbusinesswiththesignificant proportionofitsassetsinvestedinfixed incomesecuritiesanditsresultsare thereforeaffectedbyfluctuationsin prevailinginterestrates.Inparticular,fixed annuitiesandstablevalueproductswritten byJacksonexposePrudentialtotherisk thatchangesininterestrates,whicharenot fullyreflectedintheinterestratescredited tocustomers,willreducespread.The spreadisthedifferencebetweentherate ofreturnJacksonisabletoearnonthe assetsbackingthepolicyholders’liabilities andtheamountsthatarecreditedto policyholdersintheformofbenefit increases,subjecttominimumcrediting rates.Declinesinspreadfromthese productsorotherspreadbusinesses thatJacksonconducts,andincreases insurrenderlevelsarisingfrominterest raterises,couldhaveamaterialimpact onitsbusinessesorresultsofoperations. Asignificantpartoftheprofitfrom M&GPrudential’sinsuranceoperations isrelatedtobonusesforpolicyholders declaredonwith-profitsproducts, whicharebroadlybasedonhistorical andcurrentratesofreturnonequity,real estateandfixedincomesecurities,aswell asPrudential’sexpectationsoffuture investmentreturns.Thisprofitcould belowerinasustainedlowinterest rateenvironment. Prudential is subject to the risk of potential sovereign debt credit deterioration owing to the amounts of sovereign debt obligations held in its investment portfolio Investinginsovereigndebtcreates exposuretothedirectorindirect consequencesofpolitical,socialor economicchanges(includingchangesin governments,headsofstateormonarchs) inthecountriesinwhichtheissuersare locatedandthecreditworthinessofthe sovereign.Investmentinsovereigndebt obligationsinvolvesrisksnotpresentin debtobligationsofcorporateissuers. Inaddition,theissuerofthedebtorthe governmentalauthoritiesthatcontrolthe repaymentofthedebtmaybeunableor unwillingtorepayprincipalorpayinterest whendueinaccordancewiththetermsof suchdebt,andPrudentialmayhavelimited recoursetocompelpaymentintheeventof adefault.Asovereigndebtor’swillingness orabilitytorepayprincipalandtopay interestinatimelymannermaybeaffected by,amongotherfactors,itscashflow situation,itsrelationswithitscentralbank, theextentofitsforeigncurrencyreserves, theavailabilityofsufficientforeign exchangeonthedateapaymentisdue, therelativesizeofthedebtserviceburden totheeconomyasawhole,thesovereign debtor’spolicytowardlocaland internationallenders,andthepolitical constraintstowhichthesovereigndebtor maybesubject. Moreover,governmentsmayuseavariety oftechniques,suchasinterventionbytheir centralbanksorimpositionofregulatory controlsortaxes,todevaluetheir currencies’exchangerates,ormayadopt monetaryandotherpolicies(includingto managetheirdebtburdens)thathavea similareffect,allofwhichcouldadversely impactthevalueofaninvestmentin sovereigndebtevenintheabsenceof atechnicaldefault.Periodsofeconomic uncertaintymayaffectthevolatilityof marketpricesofsovereigndebttoagreater extentthanthevolatilityinherentindebt obligationsofothertypesofissuers. Inaddition,ifasovereigndefaultorother sucheventsdescribedabovewereto occur,otherfinancialinstitutionsmayalso sufferlossesorexperiencesolvencyor otherconcerns,andPrudentialmightface additionalrisksrelatingtoanydebtheldin suchfinancialinstitutionsheldinits investmentportfolio.Thereisalsoriskthat publicperceptionsaboutthestabilityand creditworthinessoffinancialinstitutions andthefinancialsectorgenerallymightbe adverselyaffected,asmightcounterparty relationshipsbetweenfinancialinstitutions. Ifasovereignweretodefaultonits obligations,oradoptedpoliciesthat devaluedorotherwisealteredthe currenciesinwhichitsobligationswere denominatedthiscouldhaveamaterial adverseeffectonPrudential’sfinancial conditionandresultsofoperations. Prudential is subject to the risk of exchange rate fluctuations owing to the geographical diversity of its businesses Duetothegeographicaldiversityof Prudential’sbusinesses,Prudentialis subjecttotheriskofexchangerate fluctuations.Prudential’soperationsinthe USandAsia,whichrepresentasignificant proportionofoperatingprofitbasedon longer-terminvestmentreturnsand shareholders’funds,generallywrite policiesandinvestinassetsdenominated inlocalcurrencies.Althoughthispractice limitstheeffectofexchangerate fluctuationsonlocaloperatingresults, itcanleadtosignificantfluctuationsin Prudential’sconsolidatedfinancial statementsuponthetranslationofresults intopoundssterling.Thisexposureisnot currentlyseparatelymanaged.The currencyexposurerelatingtothe translationofreportedearningscould impactfinancialreportingratiossuchas dividendcover,whichiscalculatedas operatingprofitaftertaxonanIFRSbasis, dividedbythedividendsrelatingtothe reportingyear.Theimpactofgainsor lossesoncurrencytranslationsisrecorded asacomponentofshareholders’funds withinothercomprehensiveincome. Consequently,thiscouldimpact Prudential’sgearingratios(definedas debtoverdebtplusshareholders’funds). TheGroup’ssurpluscapitalpositionfor regulatoryreportingpurposesmayalsobe affectedbyfluctuationsinexchangerates withpossibleconsequencesforthedegree offlexibilitythatPrudentialhasin managingitsbusiness. 408 Prudential plc AnnualReport2018 www.prudential.co.uk Risk factors continuedPrudential conducts its businesses subject to regulation and associated regulatory risks, including the effects of changes in the laws, regulations, policies and interpretations and any accounting standards in the markets in which it operates Changesingovernmentpolicyand legislation(includinginrelationtotax), capitalcontrolmeasuresoncompanies andindividuals,regulationorregulatory interpretationapplyingtocompaniesinthe financialservicesandinsuranceindustries inanyofthemarketsinwhichPrudential operates(includingthoserelatedtothe conductofbusinessbyPrudentialorits thirdpartydistributors),ordecisionstaken byregulatorsinconnectionwiththeir supervisionofmembersoftheGroup, whichinsomecircumstancesmaybe appliedretrospectively,mayadversely affectPrudential.Theproposeddemerger ofM&GPrudentialfromPrudentialplcwill resultinachangetoPrudential’sgroup- widesupervisortotheHongKong InsuranceAuthority,andasaconsequence willchangethegroup-widesupervisory frameworktowhichPrudentialissubject, thefinalformofwhichremainsuncertain. Theimpactfromanyregulatorychanges mayaffectPrudential’sproductrange, distributionchannels,competitiveness, profitability,capitalrequirements,risk managementapproaches,corporateor governancestructureand,consequently, reportedresultsandfinancing requirements.Also,regulatorsin jurisdictionsinwhichPrudentialoperates mayimposerequirementsaffectingthe allocationofcapitalandliquiditybetween differentbusinessunitsintheGroup, whetheronageographic,legalentity, productlineorotherbasis.Regulators maychangethelevelofcapitalrequiredto beheldbyindividualbusinesses,the regulationofsellingpractices,solvency requirementsandcouldintroduce changesthatimpacttheproductssold. Furthermore,asaresultofinterventionsby governmentsinlightoffinancialandglobal economicconditions,theremaycontinue tobechangesingovernmentregulation andsupervisionofthefinancialservices industry,includingthepossibilityofhigher capitalrequirements,restrictionson certaintypesoftransactionsandenhanced supervisorypowers. Recentshiftsinthefocusofsomenational governmentstowardmoreprotectionist orrestrictiveeconomicandtradepolicies couldimpactonthedegreeandnature ofregulatorychangesandPrudential’s competitivepositioninsomegeographic markets.Thiscouldtakeeffect,for example,throughincreasedfrictionin cross-bordertradeormeasuresfavouring localenterprisessuchaschangestothe maximumlevelofnon-domesticownership byforeigncompanies. TheEuropeanUnion’sSolvencyIIDirective cameintoeffecton1January2016. Themeasureofregulatorycapitalunder SolvencyIIismorevolatilethanunderthe previousSolvencyIregimeandregulatory policymayfurtherevolveunderthe regime.TheEuropeanCommissionbegan areviewinlate2016ofsomeaspectsofthe SolvencyIIlegislativepackage,whichis expectedtocontinueuntil2021and includesareviewoftheLongTerm Guaranteemeasures.Prudentialapplied for,andhasbeengrantedapprovalbythe UKPrudentialRegulationAuthoritytouse thefollowingmeasureswhencalculating itsSolvencyIIcapitalrequirements:the useofaninternalmodel,the‘matching adjustment’forUKannuities,the‘volatility adjustment’forselectedUSdollar- denominatedbusiness,andUKtransitional measuresontechnicalprovisions. Prudentialalsohaspermissiontouse ‘deductionandaggregation’asthemethod bywhichthecontributionoftheGroup’s USinsuranceentitiestotheGroup’s solvencyiscalculated,whichineffect recognisessurplusinUSinsuranceentities inexcessof250percentoflocalUSRisk BasedCapitalrequirements.Foraslongas Prudentialoritsbusinessesremainsubject toSolvencyII,thereisariskthatchanges mayberequiredtoPrudential’sapproved internalmodelorotherSolvencyII approvals,whichcouldhaveamaterial impactontheGroupSolvencyIIcapital position.Whereinternalmodelchanges aresubjecttoregulatoryapproval,there isariskthattheapprovalisdelayedornot given.Insuchcircumstances,changesin ourriskprofilewouldnotbeabletobe appropriatelyreflectedinourinternal model,whichcouldhaveamaterialimpact ontheGroup’sSolvencyIIcapitalposition. Currentlytherearealsoanumberofother globalregulatorydevelopmentswhich couldimpactPrudential’sbusinessesin itsmanyjurisdictions.Theseincludethe Dodd-FrankWallStreetReformand ConsumerProtectionAct(Dodd-Frank Act)intheUS,theworkoftheFinancial StabilityBoard(FSB)intheareaofsystemic riskincludingthedesignationofGlobal SystemicallyImportantInsurers(G-SIIs), theInsuranceCapitalStandard(ICS)being developedbytheInternationalAssociation ofInsuranceSupervisors(IAIS),theEU MarketsinFinancialInstrumentsDirective (the‘MiFIDIIDirective’)andassociated implementingmeasures,whichcame intoforceon3January2018andtheEU GeneralDataProtectionRegulation, whichcameintoforceon25May2018. Inaddition,regulatorsinanumberof jurisdictionsinwhichtheGroupoperates arefurtherdevelopinglocalcapital regimes;thisincludespotentialfuture developmentsunderSolvencyIIintheUK (asreferredtoabove),NationalAssociation ofInsuranceCommissioners’(NAIC) reformsintheUSandamendmentsto certainlocalstatutoryregimesinsome territoriesinAsia.Thereremainsahigh degreeofuncertaintyoverthepotential impactofthesechangesontheGroup. TheDodd-FrankActprovidesfora comprehensiveoverhaulofthefinancial servicesindustrywithintheUSincluding reformstofinancialservicesentities, productsandmarkets.Thefullimpact oftheDodd-FrankActonPrudential’s businessesremainsunclear,asmany ofitsprovisionsareprimarilyfocusedon thebankingindustry,haveadelayed effectivenessand/orrequirerule-making orotheractionsbyvariousUSregulators overthecomingyears.Thereisalso potentialuncertaintysurroundingfuture changestotheDodd-FrankActunderthe currentUSadministration. Prudential’sdesignationasaG-SIIwaslast reaffirmedon21November2016.The FSB,inconjunctionwiththeIAIS,didnot publishanewlistofG-SIIsin2017anddid notengageinG-SIIidentificationfor2018 followingIAIS’launchoftheconsultation ontheHolisticFramework(HF)on 14November2018,whichaimstoassess andmitigatesystemicriskintheinsurance sectorandisintendedtoreplacethe currentG-SIImeasures.TheIAISintends toimplementtheHFin2020anditis proposedthatG-SIIidentificationbe suspendedfromthatyear.Intheinterim, therelevantgroup-widesupervisorshave committedtocontinueapplyingexisting enhancedG-SIIsupervisorypolicy measureswithsomesupervisory discretion,whichincludesarequirement tosubmitenhancedriskmanagement plans.InNovember2022,theFSBwill reviewtheneedtoeitherdiscontinueor re-establishanannualidentificationof G-SIIsinconsultationwiththeIAISand nationalauthorities.TheHigherLoss Absorbency(HLA)standard(aproposed additionalcapitalmeasureforG-SII designatedfirms,plannedtoapplyfrom www.prudential.co.uk AnnualReport2018 Prudential plc 409 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional information2022)isnotpartoftheproposedHF. However,theHFproposesmore supervisorypowersofintervention formitigatingsystemicriskincluding temporaryfinancialreinforcement measuressuchascapitaladd-onsand suspensionofdividends. TheIAISisalsodevelopingtheICSaspart ofComFrame–theCommonFramework forthesupervisionofInternationally ActiveInsuranceGroups(IAIGs).The implementationofICSwillbeconductedin twophases–afive-yearmonitoringphase followedbyanimplementationphase. ComFramewillmoregenerallyestablish asetofcommonprinciplesandstandards designedtoassistsupervisorsin addressingrisksthatarisefrominsurance groupswithoperationsinmultiple jurisdictions.TheComFrameproposals, includingICS,couldresultinenhanced capitalandregulatorymeasuresforIAIGs, forwhichPrudentialsatisfiesthecriteria. Inlate2018,theUSNAICconcluded anindustryconsultationwiththeaimof reducingthenon-economicvolatilityin thevariableannuitystatutorybalance sheetandenhancingriskmanagement. TheNAICistargetingaJanuary2020 effectivedateforthenewframework, whichwillhaveanimpactonJackson’s business.Jacksoncontinuestoassessand testthechanges.TheNAICalsohasan ongoingreviewoftheC-1bondfactorsin therequiredcapitalcalculation,onwhich furtherinformationisexpectedtobe providedinduecourse.TheGroup’s preparationstomanagetheimpactof thesereformswillcontinue. On27July2017,theUKFCAannounced thatitwillnolongerpersuade,oruseits powerstocompel,panelbankstosubmit ratesforthecalculationofLIBORafter 2021.ThediscontinuationofLIBORin itscurrentformanditsreplacementwith theSterlingOvernightIndexAverage benchmark(SONIA)intheUK(and otheralternativebenchmarkratesin othercountries)could,amongotherthings, impacttheGroupthroughanadverse effectonthevalueofPrudential’sassets andliabilitieswhicharelinkedtoorwhich referenceLIBOR,areductioninmarket liquidityduringanyperiodoftransition andincreasedlegalandconductrisksto theGrouparisingfromchangesrequired todocumentationanditsrelated obligationstoitsstakeholders. VariousjurisdictionsinwhichPrudential operateshavecreatedinvestor compensationschemesthatrequire mandatorycontributionsfrommarket participantsinsomeinstancesintheevent ofafailureofamarketparticipant.Asa majorparticipantinthemajorityofits chosenmarkets,circumstancescould ariseinwhichPrudential,alongwithother companies,mayberequiredtomake suchcontributions. TheGroup’saccountsarepreparedin accordancewithcurrentInternational FinancialReportingStandards(IFRS) applicabletotheinsuranceindustry. TheInternationalAccountingStandards Board(IASB)introducedaframeworkthat itdescribedasPhaseIwhich,underits standardIFRS4permittedinsurersto continuetousethestatutorybasisof accountingforinsuranceassetsand liabilitiesthatexistedintheirjurisdictions priortoJanuary2005.InMay2017,the IASBpublisheditsreplacementstandard oninsuranceaccounting(IFRS17, ‘InsuranceContracts’),whichwillhavethe effectofintroducingfundamentalchanges tothestatutoryreportingofinsurance entitiesthatprepareaccountsaccording toIFRSfrom2021.InNovember2018, theIASBtentativelydecidedtodelaythe effectivedateofIFRS17byoneyearto periodsbeginningonorafter1January 2022andisconsideringintroducingfurther amendmentstothisnewstandard.The EuropeanUnionwillapplyitsusualprocess forassessingwhetherthestandardmeets thenecessarycriteriaforendorsement. TheGroupisreviewingthecomplex requirementsofthisstandardand consideringitspotentialimpact.The effectofchangesrequiredtotheGroup’s accountingpoliciesasaresultof implementingthenewstandardiscurrently uncertain,butthesechangescanbe expectedto,amongstotherthings,alter thetimingofIFRSprofitrecognition. Giventheimplementationofthisstandard islikelytorequiresignificantenhancements toIT,actuarialandfinancesystemsofthe Group,itwillalsohaveanimpactonthe Group’sexpenses. AnychangesormodificationofIFRS accountingpoliciesmayrequireachange inthewayinwhichfutureresultswillbe determinedand/oraretrospective adjustmentofreportedresultsto ensureconsistency. The implementation of complex strategic initiatives gives rise to significant execution risks, may affect the operational capacity of the Group, and may adversely impact the Group if these initiatives fail to meet their objectives Aspartoftheimplementationofits businessstrategies,Prudentialhas commencedanumberofsignificant changeinitiativesacrosstheGroup,many ofwhichareinterconnectedand/oroflarge scale,thatmayhavefinancial,operational, regulatory,customerandreputational implicationsifsuchinitiativesfail(either whollyorinpart)tomeettheirobjectives andcouldplacestrainontheoperational capacity,orweakenthecontrol environment,oftheGroup.Implementing furtherstrategicinitiativesmayamplify theserisks.TheGroup’scurrentsignificant changeinitiativesincludethecombination ofM&GandPrudentialUKandEurope, theproposeddemergerofM&GPrudential andtheintendedsaleofpartoftheUK annuityportfolio.Significantoperational executionrisksarisefromtheseinitiatives, includinginrelationtotheseparationand establishmentofstandalonegovernance underrelevantregulatoryregimes, businessfunctionsandprocesses(data, systems,people)andthirdparty arrangements. The proposed demerger of M&GPrudential carries with it execution risk and will continue to require significant management attention TheproposeddemergerofM&GPrudential issubjecttoanumberoffactorsand dependencies(includingprevailingmarket conditions,theappropriateallocation ofdebtandcapitalbetweenthetwo groupsandapprovalsfromregulatorsand shareholders).Inaddition,preparingfor andimplementingtheproposeddemerger isexpectedtocontinuetorequire significanttimefrommanagement,which maydivertmanagement’sattentionfrom otheraspectsofPrudential’sbusiness. Thereforetherecanbenocertaintyasto thetimingofthedemerger,orthatitwillbe completedasproposed(oratall).Further, iftheproposeddemergeriscompleted, therecanbenoassurancethateither PrudentialplcorM&GPrudentialwill realisetheanticipatedbenefitsofthe transaction,orthattheproposeddemerger willnotadverselyaffectthetradingvalue orliquidityofthesharesofeitherorboth ofthetwobusinesses. 410 Prudential plc AnnualReport2018 www.prudential.co.uk Risk factors continuedThe intended UK exit from the EU may adversely impact economic conditions, increase market volatility, increase political and regulatory uncertainty, and cause operational disruption (including reduced access to EU markets) which could have adverse effects on Prudential’s business and its profitability On29March2017,theUKsubmittedthe formalnotificationofitsintentionto withdrawfromtheEUpursuanttoArticle 50oftheTreatyontheEuropeanUnion, asamended.Followingsubmissionofthis notification,theUKhasamaximumperiod oftwoyearstonegotiatethetermsofits withdrawalfromtheEU.Ifnoformal withdrawalagreementisreachedbetween theUKandtheEU,thenitisexpected theUK’smembershipoftheEUwill automaticallyterminateat11.00pmGMT on29March2019.TheUK’sdecisionto leavetheEUwillhavepolitical,legaland economicramificationsforboththeUK andtheEU,althoughtheseareexpected tobemorepronouncedfortheUK. TheGrouphasseveralUK-domiciled operations,principallyM&GPrudential, andthesewillbeimpactedbyaUK withdrawalfromtheEU,although contingencyplanshavebeendeveloped andenactedsincethereferendumresult toensurethatPrudential’sbusinessisnot undulyaffectedbytheUKwithdrawal. Theoutcomeofthenegotiationsonthe UK’swithdrawalandanysubsequent negotiationsontradeandaccesstothe country’smajortradingmarkets,including thesingleEUmarket,iscurrentlyunknown. Asaresult,thereisongoinguncertainty overthetermsunderwhichtheUKwill leavetheEU,inparticularafterthe transitionalperiodendinginDecember 2020(whichitselfisyettobeagreedina legallybindingmanner),andthepotential foradisorderlyexitbytheUKwithouta negotiatedagreement.WhiletheGroup hasundertakensignificantworktoplanfor andmitigatesuchrisks,therecanbeno assurancethattheseplansandeffortswill besuccessful. Inparticular,dependingonthenature oftheUK’sexitfromtheEU,someorallof thefollowingrisksmaymaterialise,which mayimpactthebusinessoftheGroupand itsprofitability: — TheUKandEUmayexperience adownturnineconomicactivity. Theeffectofanydownturnisexpected tobemorepronouncedfortheUK particularlyintheeventofadisorderly exitbytheUKfromtheEU.Market volatilityandilliquiditymayincrease (includingforpropertyfunds,where redemptionrestrictionsmaybeapplied) intheperiodleadingupto,and following,theUK’swithdrawal.This couldleadtopotentialdowngradesin sovereignandcorporatedebtratings intheUKandtheEUandfallsinUK propertyvalues.Inaseverescenario wheretheUK’ssovereignratingis downgradedbypotentiallymorethan onenotch,thismayalsoimpactonthe ratingsofUKcompanies,including Prudential’sUKbusiness.Furtheror prolongedinterestratereductionsmay occurduetomonetaryeasing.These impactsmayresultintheadverse effectsoutlinedinthemarketand generaleconomicconditionsriskfactor. — TheUK’sexitfromtheEUcould resultinsignificantchangestothe legalandregulatoryregimeunder whichtheGroup(and,inparticular, M&GPrudential)operates,thenature andextentofwhichremainuncertain whiletheoutcomeofnegotiations regardingtheUK’swithdrawalfrom theEUandtheextentandtermsofany futureaccesstothesingleEUmarket remainstobeagreed.Theremaybe anincreaseincomplexityandcosts associatedwithoperatinginan additionalregulatoryjurisdiction. — Theremaybeincreasedriskof operationaldisruptiontothebusiness, inparticulartoM&GPrudential.Access totheEUmarket,andtheabilityto serviceEUclients,maybeadversely impacted.Negativemarketsentiment towardstheUKfrominvestorsmay resultinnegativefundflowsandEU serviceprovidersmaybelesswilling, orunabletoserviceUKfundmanagers, bothofwhichmaynegativelyimpact ontheassetmanagementbusiness ofM&GPrudential.Theinsurance businessmayexperiencehigher productlapsesresultingfromfund outflows.Theabilitytoretainand attractappropriatelyskilledstafffrom theEUmaybeadverselyimpacted. Contractualdocumentationmayneed toberenegotiatedorredraftedinorder toremaineffective. The resolution of several issues affecting the financial services industry could have a negative impact on Prudential’s reported results or on its relations with current and potential customers Prudentialis,andinthefuturemaybe, subjecttolegalandregulatoryactionsin theordinarycourseofitsbusiness,both intheUKandinternationallyonmatters relevanttothedeliveryofcustomer outcomes.Suchactionsmayrelatetothe applicationofcurrentregulationsfor exampletheFinancialConductAuthority’s (FCA)principlesandconductofbusiness rulesorthefailuretoimplementnew regulations.Theseactionscouldinvolvea reviewoftypesofbusinesssoldinthepast underacceptablemarketpracticesatthe time,suchastherequirementintheUKto provideredresstocertainpastpurchasers ofpensionsandmortgageendowment policies,changestothetaxregime affectingproducts,andregulatoryreviews ofproductssoldandindustrypractices, including,inthelattercase,linesof businessithasclosed.Currentregulatory actionsincludetheUKinsurancebusiness’s undertakingtotheFCAtoreviewannuities soldwithoutadviceafter1July2008toits contract-baseddefinedcontribution pensioncustomers.Thiswillresultinthe UKinsurancebusinessbeingrequiredto provideredresstocertainsuchcustomers. Aprovisionhasbeenestablishedtocover thecostsofundertakingthereviewand anyrelatedredressbuttheultimateamount requiredremainsuncertain. Regulatorsmayalsofocusontheapproach thatproductprovidersusetoselect third-partydistributorsandtomonitorthe appropriatenessofsalesmadebythem. Insomecases,productproviderscanbe heldresponsibleforthedeficienciesof third-partydistributors. IntheUS,therehasbeensignificant attentiononthedifferentregulatory standardsappliedtoinvestmentadvice deliveredtoretailcustomersbydifferent sectorsoftheindustry.Asaresultof reportsrelatingtoperceptionsofindustry abuses,therehavebeennumerous regulatoryinquiriesandproposalsfor legislativeandregulatoryreforms.This includesfocusonthesuitabilityofsalesof certainproducts,alternativeinvestments andthewideningofthecircumstances underwhichapersonorentityproviding investmentadvicewithrespecttocertain employeebenefitandpensionplanswould beconsideredafiduciarysubjectingthe personorentitytocertainregulatory www.prudential.co.uk AnnualReport2018 Prudential plc 411 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationrequirements.Thereisariskthatnew regulationsintroducedmayhaveamaterial adverseeffectonthesalesoftheproducts byPrudentialandincreasePrudential’s exposuretolegalrisks. heightenedcompetitionfortalentedand skilledemployeesandagentswithlocal experience,particularlyinAsia,maylimit Prudential’spotentialtogrowitsbusiness asquicklyasplanned. Litigation, disputes and regulatory investigations may adversely affect Prudential’s profitability and financial condition Prudentialis,andmayinthefuturebe, subjecttolegalactions,disputesand regulatoryinvestigationsinvarious contexts,includingintheordinarycourse ofitsinsurance,investmentmanagement andotherbusinessoperations.Theselegal actions,disputesandinvestigationsmay relatetoaspectsofPrudential’sbusinesses andoperationsthatarespecificto Prudential,orthatarecommonto companiesthatoperateinPrudential’s markets.Legalactionsanddisputesmay ariseundercontracts,regulations (includingtax)orfromacourseofconduct takenbyPrudential,andmaybeclass actions.AlthoughPrudentialbelievesthat ithasadequatelyprovidedinallmaterial respectsforthecostsoflitigationand regulatorymatters,noassurancecan beprovidedthatsuchprovisionsare sufficient.Giventhelargeorindeterminate amountsofdamagessometimessought, othersanctionsthatmightbeimposedand theinherentunpredictabilityoflitigation anddisputes,itispossiblethatanadverse outcomecouldhaveanadverseeffect onPrudential’sreputation,resultsof operationsorcashflows. Prudential’s businesses are conducted in highly competitive environments with developing demographic trends and continued profitability depends upon management’s ability to respond to these pressures and trends Themarketsforfinancialservicesinthe UK,USandAsiaarehighlycompetitive, withseveralfactorsaffectingPrudential’s abilitytosellitsproductsandcontinued profitability,includingpriceandyields offered,financialstrengthandratings, rangeofproductlinesandproductquality, brandstrengthandnamerecognition, investmentmanagementperformance, historicalbonuslevels,theabilitytorespond todevelopingdemographictrends, customerappetiteforcertainsavings productsandtechnologicaladvances. Insomeofitsmarkets,Prudentialfaces competitorsthatarelarger,havegreater financialresourcesoragreatermarket share,offerabroaderrangeofproducts orhavehigherbonusrates.Further, InAsia,theGroup’sprincipalcompetitors includegloballifeinsurerssuchasAllianz, AXA,andManulifetogetherwithregional insurerssuchasAIA,FWDandGreat Eastern,andmultinationalassetmanagers suchasFranklinTempleton,HSBCGlobal AssetManagement,J.P.MorganAsset ManagementandSchroders.Inmost markets,therearealsolocalcompanies thathaveamaterialmarketpresence. M&GPrudential’sprincipalcompetitors includemanyofthemajorretailfinancial servicescompaniesandfundmanagement companiesincluding,forexample,Aviva, JanusHenderson,Jupiter,Legal&General, SchrodersandStandardLifeAberdeen. Jackson’scompetitorsintheUSinclude majorstockandmutualinsurance companies,mutualfundorganisations, banksandotherfinancialservices companiessuchasAegon,AIG,Allianz, AXAEquitableHoldingsInc.,Brighthouse, LincolnFinancialGroup,MetLifeand PrudentialFinancial. Prudentialbelievescompetitionwill intensifyacrossallregionsinresponse toconsumerdemand,digitalandother technologicaladvances,theneedfor economiesofscaleandtheconsequential impactofconsolidation,regulatoryactions andotherfactors.Prudential’sabilityto generateanappropriatereturndepends significantlyuponitscapacitytoanticipate andrespondappropriatelytothese competitivepressures. Downgrades in Prudential’s financial strength and credit ratings could significantly impact its competitive position and damage its relationships with creditors or trading counterparties Prudential’sfinancialstrengthandcredit ratings,whichareusedbythemarketto measureitsabilitytomeetpolicyholder obligations,areanimportantfactor affectingpublicconfidenceinPrudential’s products,andasaresultits competitiveness.Downgradesin Prudential’sratingsasaresultof,for example,decreasedprofitability,increased costs,increasedindebtednessorother concernscouldhaveanadverseeffecton itsabilitytomarketproducts,retaincurrent policyholders,andontheGroup’sfinancial flexibility.Inaddition,theinterestrates Prudentialpaysonitsborrowingsare affectedbyitscreditratings,whichare inplacetomeasuretheGroup’sability tomeetitscontractualobligations. Prudentialplc’slong-termseniordebtis ratedasA2byMoody’s,AbyStandard& Poor’sandA-byFitch. Prudentialplc’sshort-termdebtisratedas P-1byMoody’s,A-1byStandard&Poor’s andF1byFitch. ThePrudentialAssuranceCompany Limited’sfinancialstrengthisratedAa3 byMoody’s,A+byStandard&Poor’sand AA-byFitch. Jackson’sfinancialstrengthisratedAA- byStandard&Poor’sandFitch,A1by Moody’sandA+byA.M.Best. PrudentialAssuranceCo.Singapore(Pte) Ltd’sfinancialstrengthisratedAA-by Standard&Poor’s. Allratingsaboveareonastableoutlook andarestatedasatthedateofthis document. Inaddition,changesinmethodologiesand criteriausedbyratingagenciescouldresult indowngradesthatdonotreflectchanges inthegeneraleconomicconditionsor Prudential’sfinancialcondition. Adverse experience in the operational risks inherent in Prudential’s business, and those of its material outsourcing partners, could disrupt its business functions and have a negative impact on its results of operations Operationalrisksarepresentinallof Prudential’sbusinesses,includingtherisk (frombothPrudentialanditsoutsourcing andexternaldatahostingpartners)of directorindirectlossresultingfrom inadequateorfailedinternalandexternal processes,systemsorhumanerror,fraud, theeffectsofnaturalorman-made catastrophicevents(suchasnatural disasters,pandemics,cyber-attacks, actsofterrorism,civilunrestandother catastrophes)orfromotherexternal events.Exposuretosucheventscould disruptPrudential’ssystemsand operationssignificantly,whichmayresult infinanciallossandreputationaldamage. Prudential’sbusinessisdependenton processingalargenumberoftransactions acrossnumerousanddiverseproducts, anditemploysalargenumberofmodels, anduserdevelopedapplications,someof whicharecomplex,initsprocesses.The long-termnatureofmuchoftheGroup’s businessalsomeansthataccuraterecords havetobemaintainedforsignificant 412 Prudential plc AnnualReport2018 www.prudential.co.uk Risk factors continuedperiods.Further,Prudentialoperatesinan extensiveandevolvinglegalandregulated environment(includinginrelationtotax) whichaddstotheoperationalcomplexity ofitsbusinessprocessesandcontrols. Thesefactors,amongothers,resultin significantrelianceon,andrequire significantinvestmentin,theinformation technology(IT)infrastructure,compliance andotheroperationalsystems,personnel andprocessesfortheperformanceofthe Group’scorebusinessactivities.During timesofsignificantchange,theoperational effectivenessofthesecomponentsmay beimpacted. AlthoughPrudential’sIT,complianceand otheroperationalsystems,modelsand processesincorporatecontrolsdesigned tomanageandmitigatetheoperationaland modelrisksassociatedwithitsactivities, therecanbenoassurancethatsuch controlswillalwaysbeeffective.Due tohumanerroramongotherreasons, operationalandmodelriskincidentsdo happenperiodicallyandnosystemor processcanentirelypreventthemalthough therehavenotbeenanymaterialeventsto date.Prudential’slegacyandotherIT systemsandprocesses,aswithoperational systemsandprocessesgenerally,maybe susceptibletofailureorsecuritybreaches. Sucheventscould,amongotherthings, harmPrudential’sabilitytoperform necessarybusinessfunctions,resultin thelossofconfidentialorproprietarydata (exposingittopotentiallegalclaimsand regulatorysanctions)anddamageits reputationandrelationshipswithits customersandbusinesspartners.Similarly, anyweaknessinadministrationsystems (suchasthoserelatingtopolicyholder recordsormeetingregulatory requirements)oractuarialreserving processescouldhaveamaterialadverse effectonitsresultsofoperationsduring theeffectiveperiod. Inaddition,Prudentialalsoreliesona numberofoutsourcing(includingexternal datahosting)partnerstoprovideseveral businessoperations,includingasignificant partoftheUKbackofficeandcustomer facingoperationsaswellasanumber ofITsupportfunctionsandinvestment operations.Thiscreatesrelianceupon theoperationalperformanceofthese outsourcingpartners,andfailureto adequatelyoverseetheoutsourcing partner,orthefailureofanoutsourcing partner(oritskeyITandoperational systemsandprocesses)couldresult insignificantdisruptiontobusiness operationsandcustomers. Attempts to access or disrupt Prudential’s IT systems, and loss or misuse of personal data, could result in loss of trust from Prudential’s customers and employees, reputational damage and financial loss Prudentialanditsbusinesspartnersare increasinglyexposedtotheriskthat individualsorgroupsmayattempttodisrupt theavailability,confidentialityandintegrity ofitsITsystems,whichcouldresultin disruptiontokeyoperations,makeitdifficult torecovercriticalservices,damageassets andcompromisetheintegrityandsecurity ofdata(bothcorporateandcustomer).This couldresultinlossoftrustfromPrudential’s customersandemployees,reputational damageanddirectorindirectfinancialloss. Thecybersecuritythreatcontinuesto evolvegloballyinsophisticationand potentialsignificance.Prudential’s increasingprofileinitscurrentmarkets andthoseinwhichitisentering,growing customerinterestininteractingwiththeir insuranceprovidersandassetmanagers throughtheinternetandsocialmedia, improvedbrandawarenessandthe classificationofPrudentialasaG-SIIcould alsoincreasethelikelihoodofPrudential beingconsideredatargetbycyber criminals.Further,therehavebeenchanges tothethreatlandscapeandtheriskfrom untargetedbutsophisticatedand automatedattackshasincreased. Thereisanincreasingrequirementand expectationonPrudentialanditsbusiness partners,tonotonlyholdcustomer, shareholderandemployeedatasecurely, butuseitinatransparentandappropriate way.Developmentsindataprotection worldwide(suchastheimplementationof EUGeneralDataProtectionRegulationthat cameintoforceon25May2018)mayalso increasethefinancialandreputational implicationsforPrudentialfollowinga significantbreachofits(oritsthird-party suppliers’)ITsystems.Todate,Prudential hasnotidentifiedafailureorbreach,oran incidentofdatamisuse,whichhashada materialimpactinrelationtoitslegacyand otherITsystemsandprocesses.However, ithasbeen,andlikelywillcontinuetobe, subjecttopotentialdamagefromcomputer viruses,attemptsatunauthorisedaccess andcybersecurityattackssuchas‘denial ofservice’attacks(which,forexample, cancausetemporarydisruptionto websitesandITnetworks),phishingand disruptivesoftwarecampaigns. Prudentialiscontinuallyenhancingits ITenvironmenttoremainsecureagainst emergingthreats,togetherwithincreasing itsabilitytodetectsystemcompromise andrecovershouldsuchanincidentoccur. However,therecanbenoassurancethat sucheventswillnottakeplacewhich mayhavematerialadverseconsequential effectsonPrudential’sbusinessand financialposition. The failure to understand and respond effectively to the risks associated with environmental, social or governance (ESG) factors could adversely affect Prudential’s achievement of its long term strategy Thebusinessenvironmentinwhich Prudentialoperatesiscontinually changing.ESG-relatedissuesmaydirectly orindirectlyimpactkeystakeholders, rangingfromcustomerstoinstitutional investors,employees,suppliersand regulators,allofwhomhaveexpectations inthisarea.Afailuretomanagethose materialriskswhichhaveESGimplications mayadverselyimpactonthereputation andbrandoftheGroup,theresultsofits operations,itscustomers,anditsability todeliveronitslong-termstrategyand thereforeitslong-termsuccess. ClimatechangeisoneESGthemethat posespotentiallysignificantrisksto Prudentialanditscustomers,notonly fromthephysicalimpactsofclimate change,drivenbybothspecificshort-term climate-relatedeventssuchasnatural disastersandlonger-termimpacts,but alsofromtransitionrisksassociated withtheshifttoalowcarboneconomy. Climate-drivenchangesincountriesin whichPrudentialoperatescouldchange itsclaimsprofile.Thereisanincreasing expectationfromstakeholdersfor Prudentialtounderstand,manageand provideincreasedtransparencyofits exposuretoclimate-relatedrisks.For example,theFSB’sTaskForceonClimate- relatedDisclosuresrecommendationswere publishedin2017toprovideavoluntary frameworkoncorporateclimate-related financialdisclosuresfollowingtheFSB’s concernthattheremaybesystemicrisk inthefinancialsystemrelatedto climatechange. Asgovernmentsandpolicymakerstake actiontoreducegreenhousegasemissions andlimitglobalwarming,thetransition toalowcarboneconomycouldhavean adverseimpactonglobalinvestmentasset valuationswhilstatthesametimepresent investmentopportunitieswhichtheGroup willneedtomonitor.Inparticular,thereis ariskthatthistransitioncouldresultin someassetsectorsfacingsignificantly www.prudential.co.uk AnnualReport2018 Prudential plc 413 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationhighercostsandadisorderlyadjustment totheirassetvalues.Thiscouldleadtoan adverseimpactonthevalueandthefuture performanceoftheinvestmentassets oftheGroup.Thepotentialbroader economicimpactfromthismayimpact uponcustomerdemandfortheGroup’s products.GiventhatPrudential’s investmenthorizonsarelongterm, itispotentiallymoreexposedtothe long-termimpactofclimatechangerisks. Additionally,Prudential’sstakeholders increasinglyexpectresponsibleinvestment principlestobeadoptedtodemonstrate thatESGconsiderations(includingclimate change)areeffectivelyintegratedinto investmentdecisionsandfiduciaryand stewardshipduties. Adverse experience relative to the assumptions used in pricing products and reporting business results could significantly affect Prudential’s results of operations Incommonwithotherlifeinsurers,the profitabilityoftheGroup’sbusinesses dependsonamixoffactorsincluding mortalityandmorbiditylevelsandtrends, policysurrendersandtake-uprateson guaranteefeaturesofproducts,investment performanceandimpairments,unitcost ofadministrationandnewbusiness acquisitionexpenses.TheGroup’s businessesaresubjecttoinflationrisk. Inparticular,theGroup’smedicalinsurance businessesinAsiaarealsoexposedto medicalinflationrisk. Prudentialneedstomakeassumptions aboutanumberoffactorsindetermining thepricingofitsproducts,forsetting reserves,andforreportingitscapitallevels andtheresultsofitslong-termbusiness operations.Forexample,theassumption thatPrudentialmakesaboutfuture expectedlevelsofmortalityisparticularly relevantforitsUKannuitybusiness,where paymentsareguaranteedforatleastas longasthepolicyholderisalive.Prudential conductsrigorousresearchintolongevity risk,usingindustrydataaswellasitsown substantialannuitantexperience.Aspart ofitspensionannuitypricingandreserving policy,Prudential’sUKbusinessassumes thatcurrentratesofmortalitycontinuously improveovertimeatlevelsbasedon adjusteddataandinformedbymodels fromtheContinuousMortality Investigation(CMI)aspublishedbythe InstituteandFacultyofActuaries. Assumptionsaboutfutureexpectedlevels ofmortalityarealsoofrelevancetothe GuaranteedMinimumWithdrawalBenefit (GMWB)ofJackson’svariableannuity business.Ifmortalityimprovementrates significantlyexceedtheimprovement assumed,Prudential’sresultsofoperations couldbeadverselyaffected. Afurtherfactoristheassumptionthat Prudentialmakesaboutfutureexpected levelsoftheratesofearlyterminationof productsbyitscustomers(knownas persistency).Thisisrelevanttoanumber oflinesofbusinessintheGroup,especially forJackson’sportfolioofvariableannuities. Prudential’spersistencyassumptions reflectacombinationofrecentpast experienceforeachrelevantlineof businessandexpertjudgement,especially wherealackofrelevantandcredible experiencedataexists.Anyexpected changeinfuturepersistencyisalso reflectedintheassumption.Ifactuallevels offuturepersistencyaresignificantly differentthanassumed,theGroup’sresults ofoperationscouldbeadverselyaffected. Furthermore,Jackson’svariableannuity productsaresensitivetoothertypesof policyholderbehaviour,suchasthe take-upofitsGMWBproductfeatures. Inaddition,Prudential’sbusinessmaybe adverselyaffectedbyepidemicsandother effectsthatgiverisetoalargenumberof deathsoradditionalsicknessclaims,aswell asincreasestothecostofmedicalclaims. Significantinfluenzaandotherepidemics haveoccurredanumberoftimes historicallybutthelikelihood,timing,or theseverityoffutureepidemicscannotbe predicted.Theeffectivenessofexternal parties,includinggovernmentaland non-governmentalorganisations,in combatingthespreadandseverityofany epidemicscouldhaveamaterialimpacton theGroup’slossexperience. As a holding company, Prudential is dependent upon its subsidiaries to cover operating expenses and dividend payments TheGroup’sinsuranceandinvestment managementoperationsaregenerally conductedthroughdirectandindirect subsidiaries,whicharesubjecttothe risksdiscussedelsewhereinthis ‘Riskfactors’section. Asaholdingcompany,Prudential’s principalsourcesoffundsareremittances fromsubsidiaries,shareholder-backed funds,theshareholdertransferfrom long-termfundsandanyamountsthatmay beraisedthroughtheissuanceofequity, debtandcommercialpaper. CertainofPrudential’ssubsidiariesare subjecttoapplicableinsurance,foreign exchangeandtaxlaws,rulesand regulationsthatcanlimittheirabilityto makeremittances.Insomecircumstances, thiscouldlimitPrudential’sabilitytopay dividendstoshareholdersortomake availablefundsheldincertainsubsidiaries tocoveroperatingexpensesofother membersoftheGroup. Prudential operates in a number of markets through joint ventures and other arrangements with third parties, involving certain risks that Prudential does not face with respect to its consolidated subsidiaries Prudentialoperates,andincertainmarkets isrequiredbylocalregulationtooperate, throughjointventuresandothersimilar arrangements.ForsuchGroupoperations, managementcontrolisexercisedin conjunctionwithotherparticipants.The levelofcontrolexercisablebytheGroup dependsonthetermsofthecontractual agreements,inparticular,theallocationof controlamong,andcontinuedcooperation between,theparticipants.Inaddition,the levelofcontrolexercisablebytheGroup couldalsobesubjecttochangesinthe maximumlevelofnon-domesticownership imposedonforeigncompaniesincertain jurisdictions.Prudentialmayfacefinancial, reputationalandotherexposure(including regulatorycensure)intheeventthatany ofitspartnersfailstomeetitsobligations underthearrangements,encounters financialdifficulty,orfailstocomplywith localorinternationalregulationand standardssuchasthosepertainingtothe preventionoffinancialcrime.Inaddition, asignificantproportionoftheGroup’s productdistributioniscarriedoutthrough arrangementswiththirdpartiesnot controlledbyPrudentialandistherefore dependentuponcontinuationofthese relationships.Atemporaryorpermanent disruptiontothesedistribution arrangements,suchasthroughsignificant deteriorationinthereputation,financial positionorothercircumstancesofthethird partyormaterialfailureincontrols(suchas thosepertainingtothethird-partysystem failureorthepreventionoffinancialcrime) couldadverselyaffecttheresultsof operationsofPrudential. 414 Prudential plc AnnualReport2018 www.prudential.co.uk Risk factors continuedPrudential’s Articles of Association contain an exclusive jurisdiction provision UnderPrudential’sArticlesofAssociation, certainlegalproceedingsmayonlybe broughtinthecourtsofEnglandand Wales.Thisappliestolegalproceedings byashareholder(initscapacityassuch) againstPrudentialand/oritsdirectors and/oritsprofessionalserviceproviders. Italsoappliestolegalproceedings betweenPrudentialanditsdirectors and/orPrudentialandPrudential’s professionalserviceprovidersthatarise inconnectionwithlegalproceedings betweentheshareholderandsuch professionalserviceproviders.This provisioncouldmakeitdifficultforUS andothernon-UKshareholderstoenforce theirshareholderrights. Changes in tax legislation may result in adverse tax consequences Taxrules,includingthoserelatingtothe insuranceindustry,andtheirinterpretation maychange,possiblywithretrospective effect,inanyofthejurisdictionsinwhich Prudentialoperates.Significanttax disputeswithtaxauthorities,andany changeinthetaxstatusofanymember oftheGrouporintaxationlegislationor itsscopeorinterpretationcouldaffect Prudential’sfinancialconditionandresults ofoperations. www.prudential.co.uk AnnualReport2018 Prudential plc 415 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationGlossary A Actual exchange rates (AER) Actual historical exchange rates for the  specific accounting period, being the  average rates over the period for the income  statement and the closing rates at the  balance sheet date for the balance sheet. Annual premium equivalent (APE) A measure of new business activity that  is calculated as the sum of annualised  regular premiums from new business plus  10 per cent of single premiums on new  business written during the period. Asset-backed security (ABS) A security whose value and income  payments are derived from and  collateralised (or ‘backed’) by a specified  pool of underlying assets. The pool of assets  is typically a group of small and illiquid  assets that are unable to be sold individually. Available for sale (AFS) Securities that have been acquired neither  for short-term sale nor to be held to  maturity. AFS securities are measured at  fair value on the statement of financial  position with unrealised gains and losses  being booked in Other Comprehensive  Income instead of the income statement. B Back book of business The insurance policies sold in past periods  that are still in force and hence are still  recorded on the insurer’s balance sheet. Bancassurance The relationship with a bank to offer  insurance products to the bank’s customers. Bonuses Bonuses refer to the non-guaranteed benefit  added to participating life insurance policies  and are the way in which policyholders receive  their share of the profits of the policies.  There are normally two types of bonus:   — Regular bonus: expected to be added  every year during the term of the policy.  It is not guaranteed that a regular bonus  will be added each year, but once it is  added, it cannot be reversed, also  known as annual or reversionary bonus;  and  — Final bonus: an additional bonus  expected to be paid when policyholders  take money from the policies.  If investment return has been low over  the lifetime of the policy, a final bonus  may not be paid. Final bonuses may  vary and are not guaranteed. C Cash surrender value The amount of cash available to a policy  holder on the surrender of or withdrawal  from a life insurance policy or annuity  contract. Closed-book life insurance business A ‘closed book’ is essentially a group of  insurance policies that are no longer sold,  but are still featured on the books of a life  insurer as a premium-paying policy. The  insurance company has “closed the books”  on new sales of these products which will  remain in run-off until the policies expire  and all claims are settled. Constant exchange rate (CER) Prudential plc reports its results at both  actual exchange rates (AER) to reflect  actual results and also constant exchange  rates (CER) to eliminate the impact from  exchange translation. CER results are  calculated by translating prior year results  using current period foreign currency  exchange rates ie current period average  rates for the income statements and  current period closing rate for the  balance sheet. Core structural borrowings Borrowings which Prudential considers  to form part of its core capital structure  and exclude operational borrowings. Credit risk The risk of loss if another party fails to  meet its obligations, or fails to do so in  a timely fashion. Currency risk The risk that asset or liability values, cash  flows, income or expenses will be affected  by changes in exchange rates. Also  referred to as foreign exchange risk. D Deferred acquisition costs (DAC) Acquisition costs are expenses of an  insurer which are incurred in connection  with the acquisition of new insurance  contracts or the renewal of existing  insurance policies. They include  commissions and other variable sales  inducements and the direct costs of  issuing the policy, such as underwriting  and other policy issue expenses. Typically,  under IFRS, an element of acquisition  costs are deferred ie not expensed in  the year incurred, and instead amortised  in the income statement in line with  the emergence of surpluses on the  related contracts.  Deferred annuities Annuities or pensions due to be paid  from a future date or when the policyholder  reaches a specified age. Discretionary participation features (DPF) A contractual right to receive, as a  supplement to guaranteed benefits,  additional benefits:  — That are likely to be a significant portion  of the total contractual benefits;  — Whose amount or timing is  contractually at the discretion of the  issuer; and  — That are contractually based on asset,  fund, company or other entity  performance. Dividend cover Dividend cover is calculated as operating  profit after tax on an IFRS basis, divided by  the current year interim dividend plus the  proposed final dividend. E Endowment product An ordinary individual life insurance  product that provides the insured party  with various guaranteed benefits if it  survives specific maturity dates or periods  stated in the policy. Upon the death of the  insured party within the coverage period,  a designated beneficiary receives the face  value of the policy. European Embedded Value (EEV) Financial results that are prepared on  a supplementary basis to the Group’s  consolidated IFRS results and which are  prepared in accordance with a set of  Principles issued by the CFO Forum of  European Insurance Companies dated  April 2016. The principles are designed to  capture the value of the new business sold  in the period and of the business in force. F Fixed annuities (FA) Fixed annuity contracts written in the US  which allow for tax-deferred accumulation  of funds, are used for asset accumulation  in retirement planning and for providing  income in retirement and offer flexible  pay-out options. The contract holder pays  the insurer a premium, which is credited to  the contract holders’ account. Periodically,  interest is credited to the contract holders’  account and administrative charges are  deducted, as appropriate. 416  Prudential plc  Annual Report 2018  www.prudential.co.uk Guaranteed minimum death benefit (GMDB) (US) The basic death benefit offered under  variable annuity contracts, which specifies  that if the owner dies before annuity  income payments begin, the beneficiary  will receive a payment equal to the greater  of the contract value or purchase payments  less withdrawals. Guaranteed minimum income benefit (GMIB) (US) A guarantee that ensures, under certain  conditions, that the owner may annuitise  the variable annuity contract based on the  greater of (a) the actual account value or (b)  a pay-out base equal to premiums credited  with some interest rate, or the maximum  anniversary value of the account prior  to annuitisation. Guaranteed minimum withdrawal benefit (GMWB) (US) A guarantee in a variable annuity that  promises that the owner may make annual  withdrawals of a defined amount for the life  of the owner or until the total guaranteed  amount is recovered, regardless of market  performance or the actual account balance. H Health and protection These comprise health and personal  accident insurance products, which  provide morbidity or sickness benefits and  include health, disability, critical illness and  accident coverage. Health and protection  products are sold both as standalone  policies and as riders that can be attached  to life insurance products. Health and  protection riders are presented together  with ordinary individual life insurance  products for purposes of disclosure of  financial information. Fixed indexed annuities (FIA) These are similar to fixed annuities in that  the contract holder pays the insurer a  premium, which is credited to the contract  holders’ account and, periodically, interest  is credited to the contract holders’ account  and administrative charges are deducted,  as appropriate. An annual minimum  interest rate may be guaranteed, although  actual interest credited may be higher and  is linked to an equity index over its indexed  option period. Funds under management (FUM) These comprise funds of the Group held  in the statement of financial position and  external funds that are managed by  Prudential asset management operations. G Group free surplus Group free surplus at the end of the period  comprises free surplus for the insurance  businesses, representing the excess of  the net worth over the required capital  included in the EEV results, and IFRS  net assets for the asset management  businesses excluding goodwill. The free  surplus generated during the period  comprises the movement in this balance  excluding foreign exchange, capital, and  other reserve movements. Specifically,  it includes amounts maturing from the  in-force operations during the period  less the investment in new business, the  effect of market movements and other  one-off items. Guaranteed annuities Policies that pay out a fixed amount  of benefit for a defined period. Guaranteed investment contract (GIC) (US) An investment contract between an  insurance company and an institutional  investor, which provides a stated rate of  return on deposits over a specified period  of time. They typically provide for partial  or total withdrawals at book value if needed  for certain liquidity needs of the plan. Guaranteed minimum accumulation benefit (GMAB) (US) A guarantee that ensures that the contract  value of a variable annuity contract will be  at least equal to a certain minimum amount  after a specified number of years. I In-force An insurance policy or contract reflected  on records that has not expired, matured or  otherwise been surrendered or terminated. Internal rate of return (IRR) The IRR is equivalent to the discount rate  at which the present EEV value of the  post-tax cash flows expected to be earned  over the life time of the business written in  shareholder-backed life funds is equal to  the total invested capital to support the  writing of the business. The capital  included in the calculation of the IRR  is equal to the amount required to pay  acquisition costs and set up reserves less  premiums received, plus encumbered  capital. The impact of the time value of  options and guarantees is included in  the calculation. Internal vesting Internal vesting relates to proceeds from  a Prudential policy which the policyholder  has decided to reinvest in a Prudential  annuity product. International Financial Reporting Standards (IFRS) Accounting standards that all publicly  listed groups in the European Union are  required to apply in preparing consolidated  financial statements. Investment grade Investments rated BBB- or above for S&P,  Baa3 or above for Moody’s. Generally they  are bonds that are judged by the rating  agency as likely enough to meet payment  obligations that banks are allowed to invest  in them. Investment-linked products or contracts Insurance products where the surrender  value of the policy is linked to the value of  underlying investments (such as collective  investment schemes, internal investment  pools or other property) or fluctuations in  the value of underlying investment or  indices. Investment risk associated with  the product is usually borne by the  policyholder. Insurance coverage,  investment and administration services  are provided for which the charges are  deducted from the investment fund assets.  Benefits payable will depend on the price  of the units prevailing at the time of  surrender, death or the maturity of the  product, subject to surrender charges.  These are also referred to as unit-linked  products or unit-linked contracts. www.prudential.co.uk  Annual Report 2018  Prudential plc  417 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationL Liquidity coverage ratio (LCR) Prudential calculates this as assets and  resources available to us that are readily  convertible to cash to cover corporate  obligations in a prescribed stress scenario.  We calculate this ratio over a range of time  horizons extending to twelve months. Liquidity premium This comprises the premium that is  required to compensate for the lower  liquidity of corporate bonds relative to  swaps and the mark to market risk premium  that is required to compensate for the  potential volatility in corporate bond  spreads (and hence market values) at  the time of sale.  M Market value reduction (MVR) A reduction applied to the payment on  with-profits bonds when policyholders  surrender in adverse market conditions. Money Market Fund (MMF) An MMF is an open-ended mutual fund that  invests in short-term debt securities such as  US treasury bills and commercial paper. The  purpose of an MMF is to provide investors  with a safe place to invest easily accessible  cash-equivalent assets characterised as  a low-risk, low-return investment. Mortality rate Rate of death, varying by such parameters  as age, gender, and health, used in pricing  and computing liabilities for future  policyholders of life and annuity products,  which contain mortality risks. Morbidity rate Rate of sickness, varying by such  parameters as age, gender and health,  used in pricing and computing liabilities  for future policyholders of health products,  which contain morbidity risks. N Net premiums Life insurance premiums, net of  reinsurance ceded to third-party reinsurers. Net worth Net assets for EEV reporting purposes  that reflect the regulatory basis position,  sometimes with adjustments to achieve  consistency with the IFRS treatment of  certain items. New business margin The value of new business on an EEV basis  expressed as a percentage of the present  value of new business premiums expected  to be received from the new business. New business profit The profits, calculated in accordance with  European Embedded Value Principles,  from business sold in the financial reporting  period under consideration. Non-participating business A life insurance policy where the  policyholder is not entitled to a share of the  company’s profits and surplus, but receives  certain guaranteed benefits. Also known  as non-profit in the UK. Examples include  pure risk policies (eg fixed annuities, term  insurance, critical illness) and unit-linked  insurance contracts. O Open-ended investment company (OEIC) A collective investment fund structured as  a limited company in which investors can  buy and sell shares. Operational borrowings Borrowings which arise in the normal  course of the business. P Participating funds Distinct portfolios where the policyholders  have a contractual right to receive at the  discretion of the insurer additional benefits  based on factors such as the performance  of a pool of assets held within the fund, as  a supplement to any guaranteed benefits.  The insurer may either have discretion as to  the timing of the allocation of those benefits  to participating policyholders or may have  discretion as to the timing and the amount  of the additional benefits. For Prudential  the most significant participating funds are  with-profits funds for business written in the  UK, Hong Kong, Malaysia and Singapore. Participating policies or participating business Contracts of insurance where the  policyholders have a contractual right to  receive, at the discretion of the insurer,  additional benefits based on factors such as  investment performance, as a supplement  to any guaranteed benefits. This is also  referred to as with-profits business. Payback period Payback period is the time in which the  initial ‘cash’ outflow of investment is  expected to be recovered from the ‘cash’  inflows generated by the investment.  We measure cash outflow by our  investment of free surplus in new  business sales. The payback period  equals the time taken for this business  to generate free surplus to cover this  investment. Payback periods are  measured on an undiscounted basis. Persistency The percentage of policies remaining  in force from period to period. Present value of new business premiums (PVNBP) The present value of new business  premiums is calculated as equalling  single premiums plus the present value  of expected premiums of new regular  premium business, allowing for lapses and  other assumptions made in determining  the EEV new business contribution. Prudential Regulation Authority (PRA) The PRA is a UK regulatory body  responsible for Prudential regulation and  supervision of banks, building societies,  credit unions, insurers and major  investment firms. R Regular premium product A life insurance product with regular  periodic premium payments. Rider A supplemental plan that can be attached  to a basic insurance policy, with payment  of additional premium. Risk margin reserve (RMR) An RMR is included within operating profit  based on longer-term investment returns  and represents a charge for long-term  expected defaults of debt securities,  determined by reference to the credit  quality of the portfolio. 418  Prudential plc  Annual Report 2018  www.prudential.co.uk Glossary continuedV Variable annuity (VA) (US) An annuity whose value is determined by  the performance of underlying investment  options that frequently includes securities.  A variable annuity’s value is not guaranteed  and will fluctuate, depending on the value  of its underlying investments. The holder  of a variable annuity assumes the  investment risk and the funds backing a  variable annuity are held in the insurance  companies separate account. VAs are  similar to unit-linked annuities in the UK. Value of in-force business (VIF) The present value of future shareholder  cash flows projected to emerge from the  assets backing liabilities of the in-force  covered business. W Whole of life A type of life insurance policy that provides  lifetime protection; premiums must usually  be paid for life. The sum assured is paid out  whenever death occurs. Commonly used  for estate planning purposes. With-profits funds See ‘participating funds’ above. Y Yield A measure of the income received from an  investment compared to the price paid for  the investment. Normally expressed as  a percentage. T Takaful Insurance that is compliant with Islamic  principles. Time value of options and guarantees (TVOG) The value of financial options and  guarantees comprises two parts, the  intrinsic value and the time value. The  intrinsic value is given by a deterministic  valuation on best estimate assumptions.  The time value is the additional value  arising from the variability of economic  outcomes in the future. Total shareholder return (TSR) TSR represents the growth in the value  of a share plus the value of dividends paid,  assuming that the dividends are reinvested  in the Company’s shares on the ex- dividend date. U Unallocated surplus Unallocated surplus is recorded wholly  as a liability and represents the excess  of assets over policyholder liabilities for  Prudential’s with-profits funds. The  balance retained in the unallocated surplus  represents cumulative income arising on  the with-profits business that has not been  allocated to policyholders or shareholders. Unit-linked products or unit-linked contracts See ‘investment-linked products or  contracts’ above. Universal life An insurance product where the customer  pays flexible premiums, subject to specified  limits, which are accumulated in an account  and are credited with interest (at a rate  either set by the insurer or reflecting  returns on a pool of matching assets). The  customer may vary the death benefit and  the contract may permit the customer to  withdraw the account balance, typically  subject to a surrender charge. S Scottish Amicable Insurance Fund (SAIF) SAIF is a ring-fenced sub-fund of the  Prudential Assurance Company’s  long-term fund following the acquisition  of the mutually owned Scottish Amicable  Life Assurance Society in 1997. The fund  is solely for the benefit of policyholders  of SAIF. Shareholders of Prudential plc  have no interest in the profits of this  fund although they are entitled to asset  management fees on this business. Separate account A separate account is a pool of investments  held by an insurance company not in  or ‘separate’ from its general account.  The returns from the separate account  generally accrue to the policyholder.  A separate account allows an investor to  choose an investment category according  to his individual risk tolerance, and desire  for performance. Single premiums Single premium policies of insurance are  those that require only a single lump sum  payment from the policyholder. Stochastic techniques Stochastic techniques incorporate results  from repeated simulations using key  financial parameters which are subject to  random variations and are projected into  the future. Subordinated debt A fixed interest issue or debt that ranks  below other debt in order of priority for  repayment if the issuer is liquidated.  Holders are compensated for the added  risk through higher rates of interest. Under  EU insurance regulation, subordinated  debt is not treated as a liability and counts  towards the coverage of the required  minimum margin of solvency,  with limitations. Surrender The termination of a life insurance policy  or annuity contract at the request of the  policyholder after which the policyholder  receives the cash surrender value, if any,  of the contract. Surrender charge or surrender fee The fee charged to a policyholder when  a life insurance policy or annuity contract  is surrendered for its cash surrender  value prior to the end of the surrender  charge period. www.prudential.co.uk  Annual Report 2018  Prudential plc  419 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationShareholder information Communication with shareholders The Group maintains a corporate website  containing a wide range of information  relevant for private and institutional  investors, including the Group’s financial  calendar: www.prudential.co.uk Annual General Meeting The 2019 Annual General Meeting (AGM)  will be held in the Churchill Auditorium at  The QEII Centre, Broad Sanctuary,  Westminster, London SW1P 3EE on  16 May 2019 at 11.00am.  Prudential will continue its practice of  calling a poll on all resolutions and the  voting results, including all proxies lodged  prior to the meeting, will be displayed at  the meeting and subsequently published  on the Company’s website.  Details of the 2018 AGM, including the  major items discussed at the meeting and  the results of the voting, can be found on  the Company’s website.  In accordance with relevant legislation,  shareholders holding 5 per cent or more  of the fully paid up issued share capital are  able to require the Directors to hold a  general meeting. Written shareholder  requests should be addressed to the  Group Company Secretary at the  registered office.  Documents on display The terms and conditions of all Directors’  appointments are available for inspection  at the Company’s registered office during  normal business hours and at the AGM.  Company constitution Prudential is governed by the Companies  Act 2006, other applicable legislation and  regulations, and provisions in its Articles  of Association (Articles). In 2018, the  Company reviewed and updated its  Articles in order to reflect changes to  English company law and bring them into  line with best practice. These updates were  put to shareholders at the Company’s AGM  held on 17 May 2018 and duly approved.  The principal changes were summarised  for shareholders in an appendix to the  notice of meeting, these included, deleting  articles relating to the allotment of shares  and disapplication of pre-emption rights to  reflect the Company’s practice of seeking  authority from shareholders annually,  giving the Company the ability to hold  hybrid general meetings, amending  the deemed delivery provision for  communications sent to overseas  shareholders and streamlining the process  for selling shares belonging to untraced  shareholders. Other amendments were  made which were of a minor, technical or  Analysis of shareholder accounts as at 31 December 2018 clarifying nature. The current  Memorandum and Articles are available  on the Company’s website.  Share capital Issued share capital The issued share capital as at 31 December  2018 consisted of 2,593,044,409 (2017:  2,587,175,445) ordinary shares of 5 pence  each, all fully paid up and listed on the  London Stock Exchange and the Hong  Kong Stock Exchange. As at 31 December  2018, there were 47,260 (2017: 48,086)  accounts on the register. Further  information can be found in note C10  on page 291.  Prudential also maintains secondary  listings on the New York Stock Exchange  (in the form of American Depositary  Receipts which are referenced to ordinary  shares on the main UK register) and the  Singapore Stock Exchange.  Prudential has maintained a sufficiency  of public float throughout the reporting  period as required by the Hong Kong  Listing Rules.  Size of shareholding 1,000,001 upwards 500,001–1,000,000 100,001–500,000 10,001–100,000 5,001–10,000 1,001–5,000 1–1,000 Total Number of shareholder accounts % of total number of shareholder accounts Number of shares % of total number of shares 306 143 527 1,481 1,590 10,128 33,085 47,260 0.65 0.30 1.12 3.13 3.36 21.43 70.01 2,280,599,311 99,039,149 125,806,041 45,716,873 11,038,090 22,194,679 8,650,266 100 2,593,044,409 87.95 3.82 4.85 1.76 0.43 0.86 0.33 100 420  Prudential plc  Annual Report 2018  www.prudential.co.uk Major shareholders The table below shows the holdings  of major shareholders in the Company’s  issued ordinary share capital, as at  31 December 2018, as notified and  disclosed to the Company in accordance  with the Disclosure Guidance and  Transparency Rules.  they may do so at their discretion provided  it would be considered to be in the best  interests of the beneficiaries of the trust and  permitted under the relevant trust deed. As at 12 March 2019, Trustees held   0.38 per cent of the issued share capital  under the various plans in operation.  % of total voting rights Rights to dividends under the various  schemes are set out in the Directors’  remuneration report. Restrictions on transfer In accordance with English company law,  shares may be transferred by an instrument  of transfer or through an electronic system  (currently CREST) and any transfer is not  restricted except that the Directors may,  in certain circumstances, refuse to register  transfers of shares but only if such refusal  does not prevent dealings in the shares  from taking place on an open and proper  basis. If the Directors make use of that  power, they must send the transferee  notice of the refusal within two months.  Certain restrictions may be imposed  from time to time by applicable laws and  regulations (for example, insider trading  laws) and pursuant to the Listing Rules of  both the Financial Conduct Authority and  the Hong Kong Stock Exchange, as well  as under the rules of some of the Group’s  employee share plans.  All Directors are required to hold a  minimum number of shares under  guidelines approved by the Board, which  they would also be expected to retain as  described on page 158 of the Directors’  remuneration report.  Authority to issue shares The Directors require authority from  shareholders in relation to the issue of  shares. Whenever shares are issued, these  must be offered to existing shareholders  pro rata to their holdings unless the  Directors have been given authority by  shareholders to issue shares without  offering them first to existing shareholders.  Prudential seeks authority from its  shareholders on an annual basis to issue  shares up to a maximum amount, of which  a defined number may be issued without  pre-emption. Disapplication of statutory  pre-emption procedures is also sought for  rights issues. The existing authorities to  issue shares and to do so without observing  pre-emption rights are due to expire at  the end of this year’s AGM. Relevant  resolutions to authorise share capital  issuances will be put to shareholders at  the AGM on 16 May 2019.  Details of shares issued during 2018 and  2017 are given in note C10 on page 291.  In accordance with the terms of a waiver  granted by the Hong Kong Stock  Exchange, Prudential confirms that it  complies with the applicable law and  regulation in the UK in relation to the  holding of shares in treasury and with the  conditions of the waiver in connection  with the purchase of own shares and any  treasury shares it may hold.  Authority to purchase own shares The Directors also require authority from  shareholders in relation to the purchase  of the Company’s own shares. Prudential  seeks authority by special resolution on  an annual basis for the buyback of its own  shares in accordance with the relevant  provisions of the Companies Act 2006 and  other related guidance. This authority has  not been used since it was last granted at  the AGM in 2018. This existing authority  is due to expire at the end of this year’s  AGM and a special resolution to renew the  authority will be put to shareholders at the  AGM on 16 May 2019.  Shareholders registered on the UK register and Hong Kong and Irish branch registers 28 March 2019 Holders of US American Depositary Receipts Shareholders with ordinary shares standing to the credit of their CDP securities accounts – 28 March 2019 29 March 2019 29 March 2019 29 March 2019 17 May 2019 On or about 24 May 2019  On or about 24 May 2019  As at 31 December 2018 Capital Group Companies,  Inc. BlackRock, Inc Norges Bank 9.87 5.08 3.99 As at 12 March 2019, no notifications have  been received since the year end. Rights and obligations The rights and obligations attaching to the  Company’s shares are set out in full in the  Articles. There are currently no voting  restrictions on the ordinary shares, all of  which are fully paid, and each share carries  one vote on a poll. If votes are cast on a  show of hands, each shareholder present  in person or by proxy, or in the case of a  corporation, each of its duly authorised  corporate representatives, has one vote  except that if a proxy is appointed by more  than one member, the proxy has one vote  for and one vote against if instructed by  one or more members to vote for the  resolution and by one or more members  to vote against the resolution.  Where, under an employee share scheme,  participants are the beneficial owners of  the shares but not the registered owners,  the voting rights are normally exercisable  by the trustee on behalf of the registered  owner in accordance with the relevant plan  rules. The Trustees would not usually vote  any unallocated shares held in trust but  Dividend information 2018 second interim dividend Ex-dividend date Record date Payment date A number of dividend waivers are in place and these relate to shares issued but not allocated under the Group’s employee share plans.  These shares are held by the Trustees and will, in due course, be used to satisfy requirements under the Group’s employee share plans.  www.prudential.co.uk  Annual Report 2018  Prudential plc  421 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationShareholder enquiries For enquiries about shareholdings, including dividends and lost share certificates, please contact the Company’s registrars:  Register UK register By post By telephone Equiniti Limited, Aspect House, Spencer Road,  Lancing, West Sussex, BN99 6DA, UK.  Irish branch register Link Asset Services, Link Registrars Limited,   PO Box 7117, Dublin 2, Ireland. Hong Kong register Singapore register ADRs Computershare Hong Kong Investor Services Limited,  17M Floor, Hopewell Centre, 183 Queen’s Road East,  Wan Chai, Hong Kong.  Shareholders who have shares standing to the credit of  their securities accounts with The Central Depository  (PTE) Limited (CDP) in Singapore may refer queries to  the CDP at 9 North Buona Vista Drive, #01-19/20, The  Metropolis, Singapore 138588. Enquiries regarding  shares held in Depository Agent Sub-accounts should  be directed to your Depository Agent or broker. JPMorgan Chase Bank N.A, PO Box 64504, St. Paul,  MN 55164-0504, USA. Dividend mandates Shareholders may have their dividends  paid directly to their bank or building  society account. If you wish to take  advantage of this facility, please call  Equiniti and request a Cash Dividend  Mandate form. Alternatively, shareholders  may download the form from   www.prudential.co.uk/investors/ shareholder-information/forms Cash dividend alternative The Company operates a Dividend  Re-investment Plan (DRIP). Shareholders  who have elected for the DRIP will  automatically receive shares for all future  dividends in respect of which a DRIP  alternative is offered. The election may be  cancelled at any time by the shareholder.  Further details of the DRIP and the  timetable are available at   www.shareview.co.uk/4/Info/Portfolio/ default/en/home/shareholders/Pages/ ReinvestDividends.aspx  Electronic communications Shareholders are encouraged to elect  to receive shareholder documents  electronically by registering with  Shareview at www.shareview.co.uk  This will save on printing and distribution  costs, and create environmental benefits.  Shareholders who have registered will  be sent an email notification whenever  shareholder documents are available  on the Company’s website and a link will  be provided to that information. When  registering, shareholders will need their  shareholder reference number which can  be found on their share certificate or proxy  form. The option to receive shareholder  documents electronically is not available to  shareholders holding shares through CDP.  Please contact Equiniti if you require any  assistance or further information.  Tel 0371 384 2035 Textel 0371 384 2255 (for hard of hearing). Lines are open from 8.30am to 5.30pm  (UK), Monday to Friday. International shareholders Tel +44 121 415 7026 Tel +353 1 553 0050 Tel +852 2862 8555 Tel +65 6535 7511 Tel +1 800 990 1135,  or from outside the US  +1 651 453 2128 or log on  to www.adr.com Share dealing services The Company’s registrars, Equiniti, offer a  postal dealing facility for buying and selling  Prudential plc ordinary shares; please  see the Equiniti address or telephone  0371 384 2248. They also offer a telephone  and internet dealing service, Shareview,  which provides a simple and convenient  way of selling Prudential shares. For  telephone sales, call 0345 603 7037  between 8.00am and 4.30pm, Monday  to Friday, and for internet sales log on to  www.shareview.co.uk/dealing ShareGift Shareholders who have only a small  number of shares, the value of which  makes them uneconomic to sell, may wish  to consider donating them to ShareGift  (Registered Charity 1052686). The  relevant share transfer form may be  downloaded from our website   www.prudential.co.uk/investors/ shareholder-information/forms or  from Equiniti. Further information  about ShareGift may be obtained  on  +44 (0)20 7930 3737 or from   www.ShareGift.org  422  Prudential plc  Annual Report 2018  www.prudential.co.uk Shareholder information continuedHow to contact us Prudential plc Laurence Pountney Hill, London EC4R 0HH www.prudential.co.uk  Tel +44 (0)20 7220 7588 It is intended that the Company’s registered office will change to   1 Angel Court, London EC2R 7AG during April 2019.  Media enquiries Tel +44 (0)20 7548 2776  Email: media.relations@prudential.co.uk Board Paul Manduca Chairman Non-executive Directors Philip Remnant Senior Independent Director  Sir Howard Davies David Law Kai Nargolwala Anthony Nightingale Alice Schroeder Lord Turner Tom Watjen Fields Wicker-Miurin Business units M&GPrudential 10 Fenchurch Avenue  London   EC3M 5AG www.pru.co.uk  Tel +44 (0)800 000 000 www.mandg.co.uk  Tel +44 (0)800 328 3192 John Foley Chief Executive of   M&GPrudential Shareholder contacts Tel +44 (0)20 7548 3300  Email: investor.relations@prudential.co.uk UK Register private shareholder enquiries Tel 0371 384 2035 International shareholders   Tel +44 (0)121 415 7026 Group Executive Committee Executive Directors Mike Wells Group Chief Executive Mark FitzPatrick Chief Financial Officer  James Turner Group Chief Risk Officer Michael Falcon Chief Executive Officer of   Jackson Holdings LLC  John Foley Chief Executive of   M&GPrudential Nic Nicandrou Chief Executive of   Prudential Corporation Asia  Functional specialists Julian Adams Group Regulatory and   Government Relations Director  Jonathan Oliver Group Communications Director  Alan Porter Group General Counsel and  Company Secretary  Al-Noor Ramji Group Chief Digital Officer  Tim Rolfe Group Human Resources Director Prudential Corporation Asia 13th Floor  One International Finance Centre  1 Harbour View Street  Central  Hong Kong www.prudentialcorporation-asia.com  Tel +852 2918 6300 Jackson Holdings LLC 1 Corporate Way  Lansing  Michigan 48951  USA www.jackson.com  Tel +1 517 381 5500  Nic Nicandrou Chief Executive of   Prudential Corporation Asia Michael Falcon Chief Executive Officer of   Jackson Holdings LLC Irish Branch Register private shareholder enquiries Tel +353 1 553 0050 US American Depositary Receipts holder enquiries Tel +1 651 453 2128 Hong Kong Branch Register private shareholder enquiries Tel +852 2862 8555 The Central Depository (Pte) Limited shareholder enquiries Tel +65 6535 7511 www.prudential.co.uk  Annual Report 2018  Prudential plc  423 01 Group overview02 Strategic report03 Governance04 Directors’ remuneration report05 Financial statements06 European Embedded Value (EEV) basis results07 Additional informationForward-looking statements This Prudential Annual Report may contain ‘forward-looking statements’ with respect to certain of Prudential’s plans and its goals and  expectations relating to its future financial condition, performance, results, strategy and objectives. Statements that are not historical  facts, including statements about Prudential’s beliefs and expectations and including, without limitation, statements containing the  words ‘may’, ‘will’, ‘should’, ‘continue’, ‘aims’, ‘estimates’, ‘projects’, ‘believes’, ‘intends’, ‘expects’, ‘plans’, ‘seeks’ and ‘anticipates’, and  words of similar meaning, are forward-looking statements. These statements are based on plans, estimates and projections as at the time  they are made, and therefore undue reliance should not be placed on them. By their nature, all forward-looking statements involve risk  and uncertainty. A number of important factors could cause Prudential’s actual future financial condition or performance or other  indicated results to differ materially from those indicated in any forward-looking statement. Such factors include, but are not limited to,  the timing, costs and successful implementation of the demerger of the M&GPrudential business; the future trading value of the shares  of Prudential plc and the trading value and liquidity of the shares of the to-be-listed M&GPrudential business following such demerger;  future market conditions, including fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate  environment, and the performance of financial markets generally; the policies and actions of regulatory authorities, including, for  example, new government initiatives; the political, legal and economic effects of the UK’s decision to leave the European Union; the  impact of continuing designation as a Global Systemically Important Insurer or ‘G-SII’; the impact of competition, economic uncertainty,  inflation and deflation; the effect on Prudential’s business and results from, in particular, mortality and morbidity trends, lapse rates and  policy renewal rates; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; the  impact of internal projects and other strategic actions failing to meet their objectives; disruption to the availability, confidentiality or  integrity of Prudential’s IT systems (or those of its suppliers); the impact of changes in capital, solvency standards, accounting standards  or relevant regulatory frameworks, and tax and other legislation and regulations in the jurisdictions in which Prudential and its affiliates  operate; and the impact of legal and regulatory actions, investigations and disputes. These and other important factors may, for example,  result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits.  Further discussion of these and other important factors that could cause Prudential’s actual future financial condition or performance  or other indicated results to differ, possibly materially, from those anticipated in Prudential’s forward-looking statements can be found  under the ‘Risk factors’ section in this document. Any forward-looking statements contained in this Annual Report speak only as of the date on which they are made. Prudential expressly  disclaims any obligation to update any of the forward-looking statements contained in this report or any other forward-looking  statements it may make, whether as a result of future events, new information or otherwise except as required pursuant to the UK  Prospectus Rules, the UK Listing Rules, the UK Disclosure and Transparency Rules, the Hong Kong Listing Rules, the SGX-ST listing  rules or other applicable laws and regulations. 424  Prudential plc  Annual Report 2018  www.prudential.co.uk History Providing financial security since 1848 Successive generations have looked to Prudential to safeguard their financial security – from industrial workers and their families in Victorian Britain to over 26 million customers worldwide today. Our financial strength, heritage, prudence and focus on our customers’ long-term needs ensure that people continue to turn to our trusted brands to help them plan for today and tomorrow. 1848 Prudential is established as Prudential Mutual Assurance, Investment and Loan Association in Hatton Garden, London, offering loans and life assurance to professional people. 1912 Following the National Insurance Act, Prudential works with the government to run Approved Societies, providing sickness and unemployment benefits to five million people. 2000 Prudential plc is listed on the New York Stock Exchange. Prudential becomes the first UK life insurer to enter the Mainland China market through its joint venture with CITIC Group. 1854 Prudential opens the Industrial Department to sell a new type of insurance, Industrial Insurance, to the working classes, for premiums of a penny and upwards. 1871 The Company becomes one of the first in the City to employ women. Calculating machines are also introduced, bringing efficiencies to the processing of an increasing volume of business. 1879 Prudential moves into Holborn Bars, a purpose-built office complex designed by Alfred Waterhouse. The building becomes a London landmark, and remains part of Prudential’s property portfolio to this day. 1923 Prudential’s first overseas life branch is established in India, with the first policy being sold to a tea planter in Assam. 1924 Prudential shares are floated on the London Stock Exchange. 1949 The ‘Man from the Pru’ advertising campaign is launched. 1986 Prudential acquires Jackson National Life Insurance in the United States. 1994 Prudential Corporation Asia is formed in Hong Kong as a regional head office to expand operations beyond an existing presence in Malaysia, Singapore and Hong Kong. 1999 Prudential acquires M&G, pioneer of unit trusts in the UK and a leading provider of investment products. 2010 Prudential plc is listed on stock exchanges in Hong Kong and Singapore. 2014 Prudential acquires businesses in Ghana and Kenya, marking its entry into the fast-growing African life insurance industry. 2017 M&G and Prudential UK & Europe combine to form M&GPrudential, a leading savings and investments business ideally positioned to target growing customer demand for comprehensive financial solutions. 2018 Prudential plc announces its intention to demerge its UK and Europe business, M&GPrudential, resulting in two separately listed companies, with different investment characteristics and opportunities. Entering the computer age Prudential has a long history of innovation. Between 1964 and 1966, Prudential installed two Ferranti ‘Orion’ computers at its head office in London, forming one of the UK’s most powerful commercial computing resources at the time. The success of the first two Orions led Prudential to install a third in 1969. The Orions were used to streamline the administration of customer policy records. Prior to computerisation, records were maintained using mechanical punch cards and punching, sorting and tabulating machines. Computerisation was a huge step forward: 300 cards could be mechanically punched in an hour, but the Orion could carry out 100,000 calculations every second. While huge by modern standards, the Orions also saved valuable space. A reel of magnetic tape weighing less than eight pounds could hold the equivalent of 500,000 punched cards, which would have required 300 square feet of storage space and weighed over a tonne. www.prudential.co.uk Annual Report 2018 Prudential plc Prudential public limited company Incorporated and registered in England and Wales Registered office Laurence Pountney Hill London EC4R 0HH Registered number 1397169 www.prudential.co.uk It is intended that the Company’s registered office will change to 1 Angel Court, London EC2R 7AG during April 2019. An announcement will be made to the market to confirm this at the relevant time. Principal place of business in Hong Kong 13th Floor One International Finance Centre 1 Harbour View Street Central Hong Kong Prudential plc is a holding company, subsidiaries of which are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority. P r u d e n t i a l p l c A n n u a l R e p o r t 2 0 1 8 Printed on Revive 100 Silk, a paper made from fibre derived from 100 per cent recycled pre- and post- consumer waste; and Revive 100 Offset, which is made from 100 per cent recycled post-consumer waste. All material used in this report has been independently certified according to the rules of the Forest Stewardship Council (FSC). All pulps used are elemental chlorine free, and the inks used are vegetable oil based. The manufacturing mills and the printer are registered to the Environmental Management System ISO 14001 and are FSC chain-of-custody certified. Designed by FleishmanHillard Fishburn Printed in the UK by CPI Colour 

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